NAVOTAS POLYTECHNIC COLLEGE

Bangus St. Corner Apahap St., North Bay Boulevard South, Navotas City

TAXATION (BACC 3)
Module 2: Lecture on Principles of Taxation
( Week 4 / 5 )
TAXES
Definition

The enforced proportional constitution from persons and property levied by the lawmaking
body of the State by virtue of its sovereignty for the support of the government and all public needs.

Essential elements of a tax

1. Enforced contribution
2. Generally payable in money
3. Proportionate in character
4. Levied on persons, property, or the exercise of a right or privilege
5. Levied by the state which has jurisdiction over the subject or object of taxation
6. Levied by the lawmaking body of the state

The power of taxation can only be levied by the Congress of the Philippines through enactment
of tax statutes. But the power is also granted by the Constitution to local government units, subject to such
limitations as may be provided by law.

7. Levied for public purpose or purposes.

The term “public purpose” includes the following:

a. Constructions of roads and bridges;
b. Pensions to retired government employees and their widows and children;
c. Assistance to victims of calamities; and
d. Social welfare and health care projects

Classification of taxes

1. As to subject matter or object

a. Personal, poll or capitation – Tax of a fixed amount imposed on individuals, whether
citizens or not, residing within a specified territory without regard to their property or
the occupation in which they may be engaged. Example: Community tax

b. Property – Tax imposed on property whether real or personal in proportion either to its
Value nor in accordance with some other reasonable method of apportionment.
Example: Real Property Tax

c. Excise (Privilege Tax) – A tax imposed upon the performance of an act, the enjoyment
of a privilege, or the engaging in an occupation, any tax which does not fall within the
classification of a poll tax or a property tax .

Example: Income tax, donor’s tax, estate tax

2. As to bears the burden

a. Direct – A tax that is demanded from the person who also shoulders the burden of the
tax. Example: Income tax, donor’s tax, estate tax

b. Indirect – A tax demanded from one person in the expectation and intention that he
shall indemnify himself at the expense of another/.
Example: Value-added tax
 3. As to determination of amount

a. Specific - Tax of fixed amount imposed by the head or number, or by some standard
weight or measurement, it requires no assessment other than a listing of classification
of the subjects to be taxed. Example: Excise tax on distilled spirits, cigars, cigarettes

b Ad valorem – Tax of a fixed proportion f the value of the property with respect to
estimate the value of such property before the amount due from each taxpayer can be
determined. Example: Real property tax

4. As to purpose
a. General, fiscal or revenue – Tax that is imposed solely to raise revenue for government
expenditures. Example: Income tax , Value added tax (VAT)

b. Special - Tax imposed for a special purpose, i.e. to achieve some social or economic
ends irrespective of whether revenue is actually raised or not.
Examples: Sugar adjustment taxes, Oil Price Stabilization Fund (OPSF)

5. As to authority imposing the same

a. National – Tax imposed by the national government.
Examples: Internal revenue taxes, customs duties

b. Municipal or local - Tax imposed by municipal corporations

Example: Sand and gravel tax, Occupation tax, Realty tax

6. As to graduation or rate
a. Proportional - Taxed based on a fixed percentage of the amount of the property, receipts,
or other basis to be taxed. Example: Value-added tax, estate tax, donors ta
b. Progressive - Tax the rate of which increases as the tax base or bracket increases
Example: Income tax
c. Regressive - Tax rate of which decreases as the tax base increases

Tax distinguished from License Fee, Toll, Special Assessment and Customs Duties

License Special Customs

Taxes Fees Toll Assessment Debt Duties
*are levied
by virtue of the toll is a sum of *Generally *customs
taxing power; permit or license money for the arises from duties are
fee is a charge use of is an enforced contract, taxes levied
*has general imposed under the something, proportional *express or
upon
application; police power for generally contribution implied;
*is created by the purposes of applied to the from owners *is assignable
commodities,
law; regulation; consideration of lands for *can be paid imported into
*cannot which is paid special in kind or exported
generally for the use of a benefits *a person can across
be assigned road, bridge or resulting from be imprison national
*is generally alike, of a public for non- boundaries.
payable in money public nature improvements; payment of It follows that
* imprisonment death; taxes include
is a sanction for customs
non-payment of duties; and an
tax act granting
exemption
from all taxes
of any kind
and nature
carries with it
exemptions
from customs
duties.
are levied for is levied only
revenue, is a is imposed for Is a demand of on land
demand of regulation; proprietorship special
sovereignty assessment is
based wholly
on benefits

is generally no
 limit on the Is a
amount of tax, may not exceed composition
that may be the amount for the use of
Imposed; levied necessary to another’s
for the support of defray the cost of property, or of
the government regulation; improvements
& and amount is made by him;
regulated by
necessities;
Are imposed on Imposed only on
persons, legitimate A toll may be
property, businesses or imposed by
business, occupation the
occupation, or government or
the exercise of private
any privilege, individuals or
whether legal or entities;
illegal;
may be imposed
only by the State;

failure to pay a Non-payment of

tax does render a license fee
the business or renders the
occupation business or
illegal; occupation
illegal;

Double Taxation
In its strict sense (referred to as direct duplicate or direct double taxation), it means taxing twice for the
same purpose, by the same taxing authority, in the same jurisdiction, in the same period, some of the
property in the territory.
In a long line of cases, the Supreme Court considered double taxation as not unconstitutional
Although obnoxious. It is not itself a valid defense against the validity of a tax measure. But such taxation,
while not forbidden is something not favored, that is why it should be avoided and prevented

However, double taxation may give rise to certain defenses that would that would render the tax void, such
as

1. The two taxes which are of the same kind, nature, and from the same taxing authority make taxation
inequitable, excessive, oppressive and unreasonable.
.
2. Uniformity in taxation is violated as when the first measure applies only to limited members of the same
class.

Revenue refers to all funds or income derived by the government, whether from tax or any other source.

It may be derived from the following sources:

1. Grants received from another government:
2. Donations from non-governmental sources;
3. Loans from private entities or another government entity; Commercial revenues such as those received
by government –owned or controlled enterprises;
4. Administrative revenues such as fines, penalties and forfeitures; and
5. Taxes such as internal revenues and customs duties

Situs of Taxation

Situs of taxation means place of taxation. The rule is that the State which has jurisdiction tax the
person, property or transactions may rightfully levy and collect the tax.

Situs of taxation shall be as follows:

 1. Business, occupation or transaction – Place where the business is conducted: the place where the
occupation is practiced: or the place where the transaction took place.

2. Real and tangible property. - location of property.

3. Intangible personal property - Domicile of the owner unless the property has acquired a business situs in
another jurisdiction

4. Income - Place where the same is earned, or citizenship or domicile of the owner.

5. Gratuitous transfer of property - Residence or citizenship of the taxpayer or location of the

property.

Forms of Escape from Taxation

Escapes from taxation are means or means or methods by which the taxpayer saves the tax or
escapes the burden of tax payment.
The means resorted by the taxpayer may or may not result in loss of revenue to the government.
They may also be legal or illegal. With the exception of tax evasion, all are legal means of escape
from taxation.

The basic forms of escape from taxation are:

A. Those that do not reduce the revenue collection of the government:

1. Shifting. This is a transfer of tax burden by one on whom the tax is assessed to another. This is
exemplified by the different taxes on business.

2. Capitalization. It is the reduction in the selling price of income producing property by an

amount equal to the capitalized value of future taxes that may be paid by the purchaser.

3. Transformation. It is a method by which the manufacturer or producer upon whom the tax is
imposed pays the tax and strives to recover such expense through lower production cost without
sacrificing the quality of his product. This is resorted to because of his fear to loss his market if he
will add tax to the selling price.

Shifting and capitalization are means of escape through process of exchange, while
transformations are means through process of production.

B. Those that result in loss of revenue to the government

1. Tax evasion. It refers to fraudulent or forbidden schemes or devices designed to lessen or defeat
taxes. This is also known as tax dodging.

2. Tax avoidance. The exploitation by the taxpayer of legally permissible alternative tax rates or
methods of assessing taxable property or income in order to reduce tax liability
( also known as tax minimization).

3. Exemption from taxation. It is the grant of immunity to particular persons or corporations or

corporations or to persons or corporations of a particular class from a tax
which persons and corporation generally within the same taxing district are obliged to pay.

Tax amnesty

This is an immunity from all criminal and civil obligations arising from non-payment of taxes.
It is a general pardon given to all taxpayers: it applies only to past periods, hence of retroactive
application.
It is distinguished from tax exemption in the sense that while tax amnesty is immunity from
civil and criminal obligations, tax exemption is immunity from civil liability only. Moreover, tax
exemption is prospective in application, while tax amnesty is retroactive.
Sources of Tax Laws

1. The Constitution – The provisions of the Constitution dealing on taxation merely

regulate the exercise of the power of taxation.

2. Statutory enactments – This refers to the tax laws passed by the Congress

3. Administrative rulings and regulations – Administrative rulings are the less general
interpretation of tax laws which are issued from time to time by the Commissioner of
Internal Revenue.

4. Judicial decisions – This refers to decisions of the Court of Tax Appeals and the Supreme
Court applying or interpreting tax laws.

Power, duties and functions of the bureau

Nature, powers and duties of the Bureau of Internal Revenue

The Bureau of Internal Revenue (BIR) is an administrative agency which is involved in the in
the administration and collection of national taxes. It is the supervision and control of the
Department of Finance.

In general the powers and duties and the BIR are the following:

1. Assessment and collection of all national internal revenue taxes and charges;
2. Enforcement of all forfeitures, penalties, and fines connected therewith;
3. Execution of judgments in all cases decided in its favor by the Court of Appeals (CTA) and
the ordinary courts; and
4. Give effect to and administer the supervisory and police powers conferred to it by the National
Internal Revenue Code (NIRC) or other laws.

Internal Revenue taxes

The following taxes, fees and charges are deemed to be national internal revenue taxes:
a. Income tax e. Excise taxes
b. Estate and donor’s tax f. Documentary stamp taxes, and
c. Value-added tax g. Such other taxes as are or hereafter may be
d. Other percentage taxes imposed and collected by the BIR

Items and concept of income

Definition of Income

Income means all wealth which flows into the taxpayer other than a mere return of
capital. It includes the form of income specially described as gains derived from the sale or other
disposition of capital.
For tax purposes, income is defined as the amount of money coming to a person or
corporation within a specified time, whether as payment for services, interest, or profits from
investment. It includes earnings, lawfully or unlawfully acquired, without consensual recognition,
express or implied, of an obligation to repay and without restriction as to their disposition.
Gross income is reduced by exclusions. In other words, it is income from taxable
sources.
Taxable income refers to the pertinent items of gross income specified in the Code, less
deductions, if any, authorized for such types of income by the Code or other special laws. It is the
amount of income that is taxed.

Income tax classified

In the Philippines, our income tax is classified as:

a. A national tax c. A direct tax
b. An excise tax d. A general tax
Classification of Income Taxpayers

Income taxpayers maybe classified into individual, corporation, estate, and trust:

Individual refers to natural person, whether Filipino citizens or not and whether resident or
non-resident of the Philippines.

Corporation includes partnership, no matter how created or organized, joint-stock companies,

joint accounts, associations or insurance companies, but does not include general professional
partnerships and a joint or consortium formed for the purpose of undertaking construction projects
or engaging in petroleum, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract with the government.

Estate refers to all property, rights and obligations of a person which are not extinguished by
his death and also those which have accrued since the opening of the succession. To be subject to
income tax, an estate must be under judicial settlement. Otherwise, it is not subject to income tax.

Trust is an arrangement created by will or an agreement under which property is passed to

another for conservation or investment with the income therefrom and ultimately the corpus
instrument(principal) to be distributed in accordance with the directions of the creator as expressed
in the governing instrument. A trust to be taxable, must be an irrevocable trust both as to corpus
and income.

General definition

Gross income means all income derived from whatever sources, including (but not limited to)
the following items:

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, and
11. Partner’s distributive share from the net income of the general professional partnership

Compensation paid in kind

Compensation may be paid in money or in some medium other than money, as for example,
stocks, bonds or other forms of property.

If the amount is made in cash, the whole amount is subject to tax. However, withholding tax
required by law to be deducted by the employer from the compensation of an employee, is
considered as part of the compensation income subject to tax.

If the compensation is paid in kind, the following rules shall apply:

a. If services are for in a medium other than money, the fair market value of the thing taken in
payment is the amount to be included as compensation income;

b. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such
price will be presumed to be the fair market value of the remuneration received;

c. If the corporation transfers to its employees its own stock as remuneration for services
rendered, the amount of such remuneration is the fair market value of the stock at the
time the
services were rendered
Compensation paid in promissory note

Promissory notes received in payment of services constitute income to the extent of their
fair market value at the time of receipt.

If the notes received in payment of services constitute income to the extent of their fair
discounted value.

Tips and gratuities

Tips and gratuities paid directly to an employee by a customer of the employer which are not
accounted for by the employee to the employer are considered as taxable income of the employee
but not subject to withholding tax.

Transportation, representation and other allowances

In general, fixed or variable transportation, representation and other allowances which are
received by a public officer or employee or officer or employee of a private entity, in addition to
to the regular compensation fixed for his position or office is taxable as compensation income.

Any amount specifically, either as advances or reimbursements for travelling, representation

and other bona fide expenses which are reasonably expected to be incurred by the employee in
the performance of his duties are not compensation, if the following conditions are satisfied:

a. They are ordinary and necessary expenses.

b. They are paid or incurred by the employee in the pursuit of the trade , business or profession:
c. The employees is required to account/liquidate the foregoing expenses in accordance with the
specific requirements of substantiation for each category of expenses:

The excess of advances made over actual expenses shall constitute taxable income if such
amount if such amount is not returned to the employer.

RATA, PERA and ACA granted to government employees

Representation and Transportation Allowance (RATA) granted to public officers and

employees under the General Appropriations Act and Personnel Economic Allowance (PERA)
granted to government personnel are taxable compensation income.

However, the Additional Compensation Allowance (ACA) granted and paid to all officials
and employees of the National Government Agencies (NGA’s) including State Universities and
Colleges (SUCs)., government owned and/or controlled corporations (GOCCs), government
financial institutions(GFIs) and Local Government Units (LGUs) is part of Other Benefits which
is not subject to income tax up to ninety thousand (P90,000) pesos.

Vacation and sick leave allowances

Vacation allowances or sick leave credits which are paid to an employee constitute com-
pensation. Thus, the salary of an employee on vacation or on sick leave, which are paid not-

Illustration

Mario was sent by his manager for a two (2) day official business in Manila. He was
given P10,000 to answer for whatever expenses he will incur in connection with his travel. When
he returned back to Naga City, he liquidated the following:

Bus fare ( Naga City to Manila and back) P2,000

Hotel accommodation 2,000
Meals 1,500
One (1) night hapi-hapi with his barkada in Manila 500
Total P 6,000
======
A day after, he had a flu and was forced to go on leave for two (2) weeks. Despite his
absence, he was paid a complete salary an other allowances for that month in the amount of
P13,000.
 Based on the above information and assuming that the unspent portion of the cash advance
had been returned to the employer, how much income is subject to tax?

Answer:
Amount spent with his barkada P 500
Salary & other allowances 13,000
Income subject to tax P13,500
======
,

Fringe Benefits and Fringe Benefits tax

Definition

Fringe benefit means any good, service, or other benefit furnished or granted by an employer in cash
or n kind, in addition to basic salaries, to an individual employee (except rank and file employee) such as.
but not limited to the following:

1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel, such as maid driver and others;
5. Interest on loan at less than market rate to the extent of the difference between the market rate
and actual rate granted;
6. Membership fees, dues and other expenses borne by the employer for the employee in social and
athletic clubs or other similar organizations;
7. Expense for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents; and
10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of

Imposition of fringe benefit tax

A final withholding tax is hereby imposed on the grossed-up monetary value of fringe benefit
furnished,
granted or paid by the employer to the employee whether such employer is an individual, professional
partnership or a corporation, regardless whether the corporation is taxable or not, or the government and
its instrumentalities, except on the following:

a. Fringe benefits which are authorized and exempted from income tax under the Code or under
any special law;
b. Contributions of the employer for the benefit of the employee to retirement, insurance; and
hospitalization benefit plans

c. Benefit given to the rank-and file, whether, granted under a collective bargaining agreement or
not;
d. De minimis benefits
e. If the grant of fringe benefits to the employee is required by the nature of or necessary to the
trade, business or profession of the employer; or
f. If the grant of the fringe benefit is for the convenience or advantage of the employer (this
known
as “convenience of the employer rule)

Fringe benefits to rank and file employees

The fringe benefit tax shall not apply to rank and the employees. The fringe benefits received
by this class of employees shall form part of their taxable compensation income.

The term “rank and file employees” means all employees who are holding neither managerial
nor supervisory position.

Managerial employee is one who is vested with powers or prerogatives to lay down and
execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or
discipline employees.

Supervisory employees are those who, in the interest of the employer, effectively recommend
such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but
requires the use of independent judgment
 De minimis benefits

The term “ de minimis benefits” which are exempt from the fringe benefits tax shall in general, be

relatively small value and are offered or furnished by the employer merely as a means of promoting
the health, goodwill, contentment or efficiency of his employees.

The following shall be considered as “de minimis benefits” not subject to income tax as well as
withholding tax on compensation income or managerial, supervisory and rank-and-file employees:

1. Monetized unused leave credits of private employees not exceeding ten (10) days during the year;
2. Monetized value of vacation leave credits paid to government officials and employees;
3. Medical cash allowance or dependents of employees not exceeding P1,500 per employee per
semester
or P250 per month;
4. Rice subsidy of P2,000 or 1 sack of of 50 kilo gram rice per month amounting to not more than
P2,000.
5. Uniform and clothing allowance not exceeding P6,000 per annum;
6. Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance and medical consultations, not exceeding
P10,000 per annum.
7. Laundry allowance not exceeding P300 per month;
8. Employees achievement awards, e.g. for length of service or safety achievement, which must in
the form of a tangible property other than cash or gift certificate with an annual monetary value
not exceeding P10,000 received by the employee under an established written plan which does
not discriminate in favor of highly paid employees;
9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per
employee per annum;
10. Flowers, fruits, or books or similar items given to employees under special circumstances, e.g.
on account of illness, marriage, birth of a baby, etc.
11. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the
basic minimum wage on a per region basis; and
12. Benefits received by an employee by virtue of a Collective Bargaining Agreement( CBA) and
productivity incentives schemes provided that the incentives schemes provided that the total
annual monetary value received from both CBA and productivity incentives schemes combined
do not exceed P10,000 per employee per taxable year.

All other benefits given by employers which are not included in the above enumeration
shall not be considered as “de minimis” benefits, and hence, shall be subject to income tax as
well as withholding tax on compensation.

Employer gives benefit beyond the ceiling

The amount of de minimis benefits conforming to the ceilings herein prescribed shall
not be considered in determining the P90,000 of other benefits. However, if the employer pays
more than the ceiling the excess shall be taxable to the employee receiving the benefits only if such
excess is beyond P90,000.

Such excess, therefore, shall be considered as ordinary income of the employee and
shall