TAXATION

Camille Anne E. Duterte4LM3

December 17, 2015

GENERAL PRINCIPLES

What is Taxation?

Definition

It is the power by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government.

Why is it important?

Rationale

Taxes are what we pay for the civilized society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it.

• Taxpayers owe honesty to the government just as government owes fairness to taxpayers. (Commissioner of Internal Revenue vs Tokyo Shipping Co., Ltd., et al., GR No. 68252)

• No one, not even the State shall enrich itself at the expense of another. (BPI-Family Savings Bank, Inc. vs CA, et al., GR No.122480)

We have to understand the

relations between the State and the People in Taxation

Symbiotic Relationship (State and its People)

Where does the State get its

power to tax?

Nature of Taxing Power

• Inherent in the State• Not to be exercised arbitrarily• Power emanating from necessity.

“x x x a necessary burden to preserve the State’s sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvement designed for the enjoyment of the citizenry and those which come within the State’s territory and facilities, and protection which a government is supposed to provide.” (Phil. Guaranty Co., Inc., vs Commissioner of Internal Revenue, et al.)

Nature of Taxing Power

It is inherent but not

unlimited.

• Not granted in the Constitution; Constitution merely provides for limitations

• Peculiarly and exclusively legislative in character

• Subject to inherent and constitutional limitations

Nature of Taxing Power

What are taxes?

Taxes

Taxes are:

• Enforced proportional contribution from persons and property levied by the law-making body of the State by virtue of its sovereignty for the support of government and for public needs.

• Lifeblood of the government• Purpose: generate funds for the State to finance

the needs of the citizens and advance common weal

Taxes

Characteristics of Taxes:

Taxes have the following

characteristics:

Forced charge contribution; operates in invitum; not contracts but positive acts of the gov’t

Pecuniary burden payable in moneyLevied by the legislative body; obligations

created by lawAssessed according to reasonable rule of

apportionment

Characteristics of Taxes:

Imposed on persons, property or services within State’s jurisdiction

For public purposeGives rise to criminal liability

Characteristics of Taxes

Why do they say that the power to tax is the

power to destroy?

The Power to Destroy

Justice Holmes: The power to tax is not the power to destroy

• Taxation is not an unlimited power. The validity of the enactment (tax laws) depends upon the nature and character of the right destroyed. If so great an abuse is manifested to destroy natural and fundamental rights which no free government consistently violate, it is the duty of the judiciary to hold such an act unconstitutional.

Marshal dictum: The power to tax is the power to destroy

• It is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government.

What are the different purposes of taxation?

Purposes of Taxation

• Revenue• Non-revenue:– Promotion of general welfare– Regulation– Reduction of Social Inequity– Encourage economic growth– Protectionism

Purposes of Taxation

Principles of a Sound Tax System

It is important to know whether a tax bill intended to be passed

in Congress has the three elements of a Sound Tax imposition are present

1. Fiscal Adequacy– sufficient to meet public expenditure– Neither excess nor deficiency

2. Administrative Feasibility– Capable of being effectively administered with least

inconvenience3. Theoretical Justice– Considers taxpayer’s ability to pay– Uniform and equitable– Evolve a progressive system of taxation

Principles of a Sound Tax System

Judicial Review

When does the Judiciary come into

picture?

• As long a the legislature does not violate applicable constitutional limitations, courts have no concern with the wisdom or policy of the exaction, the political or other collateral motives behind it, the amount to be raised, or the persons, property or other privileges to be taxed.

Judicial Review

Personal Property Direct Indirect Excise General Special Specific Ad Valorem Customs Duties National Local Progressive Regressive Proportionate

Here are the different classifications of Taxes:

Classification of Taxes

LIMITATIONS ON THE TAXING POWER

Taxation Power Limitations

What are the two limitations on the

Taxing power of the State?

The limitations can either be Inherent or

Constitutional

Inherent• Proceed from the very

nature of the taxing power itself

• Distinct and positive limitations which inhere in taxing power’s nature and exist whether declared or not in the Constitution

Constitutional• Limitations found in the

Provisions in the Constitution

Taxation Power Limitations

1. Public Purpose– The State’s paramount concern is the promotion of general

welfare2. Non-delegability

– GR: Taxing power may not be delegated– XPN:

• Congress may expressly authorize the President to fix within specified limits tariff rates, import and export quotas, tonnage and wharfage dues and other duties within the framework of national development programs of the government (Sec 28 (2) Art. VI, 1987 Constitution)

• Local government units may create its source of revenues and levy taxes, fee and charges subject to guidelines and limitations of Congress consistent with the basic policy of local autonomy. (Sec. 5, Art. X, 1987 Constitution)

Inherent Limitations

Non-delegable vs Delegable legislative powers

Tax Legislation• Selection of the property to

be taxed• Determination of the

purposes for which taxes shall be levied

• Fixing the rate• Rules of taxation

Tax Administration• Power to value property• Equalization of assessments

by a central body• Collection of taxes

3. Territoriality– Situs – place of taxation– Only extends to persons, property or businesses within

its jurisdiction4. Exemption of Government from Taxes– Real property owned by the government or any of its

political subdivision is exempted unless the beneficial use is for consideration of a taxable person

5. International Comity

Inherent Limitations

• Lutz v. Araneta 98 Phil 148

• Pepsi-Cola Bottling Co. of the Ph., Inc. v. City of Butuan, et al., L-22814, Aug 28, 1968

• Smith Bell & Co., Inc. v. Commissioner of Internal Revenue, L-28271, July 25, 1975

• Phil. Guaranty Co., Inc. v. Commissioner of Internal Revenue, L-22074, Apr 30, 1965

• Wells Fargo Bank & Union Trust Co. v. Collector of Internal Revenue, 70 Phil 325

• Commissioner of Internal Revenue v. British Overseas Airways Corp., et al, GR Nos. 65773-74, Apr 30, 1987

Cases

a) Due Process of Law – Sec. 1, Art. III, 1987 Constitution

b) Equal Protection of the Law - Sec. 1, Art. III, 1987 Constitution

c) Freedom of Speech and of the Press – Sec. 4, Art. III, 1987 Constitution

d) Non-Infringement of Religious Freedom – Sec. 5, Art. III, 1987 Constitution

e) Non-Impairment of Contracts – Sec. 10, Art. III, 1987 Constitution

Constitutional Limitations

f) Origin of Appropriation, Revenue and Tariff Bills – Sec. 24, Art. VI, 1987 Constitution

g) Uniformity, Equitability and Progressivity of Taxation – Sec. 28(1), Art. VI, 1987 Constitution

h) Delegation of Legislative Authority to Fix Tariff Rate, etc. – Sec. 28(2), Art. VI, 1987 Constitution

i) Tax Exemption of Properties Actually, Directly, and Exclusively Used for Religious, Charitable, and Educational Purpose – Sec. 28(3), Art. VI, 1987 Constitution

Constitutional Limitations

• Villegas v. Hiu Chiong Tsai Pao Ho, et al., L-29646, Nov. 10, 1978

• Cagayan Electric Power & Light Co., Inc. v. Comm. of Internal Revenue, GR No. 60126, Sept. 25, 1985

• Ormoc Sugar Co. Inc v. Treasurer of Ormoc City, et al, L-23794, Feb. 17, 1968

• Assoc. of Customs Brokers, Inc., et al v. The Municipal Board, et al, 93 Phil 107

Cases

INCOME TAXATION

What is INCOME?

INCOME is wealth that flows into the taxpayer other than mere return

of capital, within a specified time

For example:You sold your house

property worth P 1,000,000 for P 1,500, 000.

Your Income from the sale was P 500, 000

House worth: P 1,000,000Sold for : P 1,500,000

Income: P 500,000

In computing for Income tax, we answer the following

questions:

1. Is there INCOME?2. Is it TAXABLE?3. WHEN should I

pay?

How do I know if Income is taxable?

Can illegal Income be taxable?

1. Income (gain)2. Realized3. Not excluded by

law

Yes, illegal income is taxable by law because it

is forfeited in favour of the government or return to

owner under Claim of Right Doctrine

You will know that income is taxable if the following are

present:

How do I know the proper period of payment?

Tax can either be computed for Gross Income (sec.

32(A), NIRC) or for Certain Passive Income (Sec. 24(B),

NIRC)

1. Interest from Bank Deposit (5 years maturity - non-taxable; 4 years - 5%; 3 years - 12%; less than 3 years - 20%)2. Royalties – 20%(except books/literary works/musical compositions – 10%)3. Prizes – 20%(except Php 10,000 or less)4. Winnings – 20%(except PCSO winnings)

The National Internal Revenue Code provides for

Certain Passive Income (Sec. 24(B),NIRC)

5. Dividends cash/ property (domestic corporation) – 10%

6. Capital gains from sale of stocks not traded (domestic corporation)

(not over than Php 100,000 - 5%; in excess of Php 100,000 – 10%)7. Capital gains from

sale of real property(in the Philippines – 6%)

1. Compensation2. Business Income3. Gains derived in

dealings in property4. Interest5. Rents6. Royalties7. Dividends8. Annuities9. Pensions10. Partners Share in

Partnership

The National Internal Revenue Code provides for

Gross Income (Sec. 32(A),NIRC)

1. Life Insurance(except Interest)2. Return of Premium3. Gifts, Bequests, Devises4. Compensation for Injuries or Sickness5. Income Exempt under Treaty6. Retirement Benefits, Pensions and Gratuities, etc. Reasonable retirement benefit plan Must be in service for at least 10

years Not less than 50 years old Has not availed of the exemption

before

The National Internal Revenue Code provides

for the Exceptions of Gross Income (Sec.

32(B),NIRC)

7. Miscellaneous Items• Income derived by

foreign government• Income derived by our

government and its political subdivisions

• Prizes and awards in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement

• Prizes and awards in sports competition

• 13TH month pay and other benefits (upto Php 82,000)

• GSIS/SSS/Medicare/Pag-Ibig/union dues

• Gains from sale of bonds, debentures, other certificate of indebtedness (maturity of 5 years)

• Gains from redemption of shares in Mutual Funds

8. Those that can be justified under the Employer’s Convenience Rule9. De minimis - of relatively small value offered as a means of promoting health, goodwill contentment or efficiency of employees• Medical cash allowance to

dependents not exceeding Php 750 per semester

• Rice subsidy of Php 1,500• Uniforms and clothing

allowance

10. Fringe Benefit – service or benefits granted by employer in cash or kind

How to compute for Fringe Benefit of recipient:

• Rank and File- Add the amount to GROSS INCOME

• Managerial or Supervisory- Divide the amount by 68% then

multiply by 32% ;- add to GROSS INCOME

What are deductions and where can I find them in the law?

Deductions are those subtracted from the taxable expenses of a person doing

business. Sec. 34 of the NIRC provides for this

I took a browse at the Deductions provision of the law. I learned that the following are deductions granted by law to

those who operate or own businesses.

Deductions:1. Ordinary and Necessary Expenses Salaries of employees Travel expenses away from home Entertainment expenses

2. InterestReduce by 33%(except those under Sec 36(B)

Sec. 36(B)No deductions if debtor and creditor are related persons Family Individual and corporation Two corporations Grantor and fiduciary Two trust and same person Fiduciary and beneficiary

3. Taxes Local Tax Business Tax Real Property Tax Vehicle RegistrationEXCEPT: Income Tax Estate Tax Donor’s Tax Foreign Income Tax declared as Tax Credit Special Assessment

4. Losses• Causality – loss of property related to business• Ordinary Losses – may be carriedover to the next 3 years

5. DepreciationFor exhaustion, wear and tear (including obsolescence of property used in business

A good example of depreciation is a vehicle used for business

which value can be divided into five, representing 5 usable years

of vehicles

Value of Vehicle

5

6. Bad debts

7. Contribution or Gifts

8. Charitable and Government Contributions

To compute for Deduction on Contribution:• Compute first for the TAXABLE

INCOME• Divide by 5% (corporation), 10%

(individual)• The quotient will be the

maximum amount that can be deducted

Sec. 36 (B)Premium Payments on Health and/ or Hospitalization Insurance of an Individual Taxpayer Does not exceed P 2,400 (P

200/month) Family Gross Income does not

exceed P 250,000 For married taxpayers, only the

spouse claiming the additional exemption for dependents shall be entitled to this

It is important to also take note of Sec. 36 (M). The

deduction is applicable also to Compensation Income Earners

After going through Deductions, the Income

Tax computation also provides for Exemptions

Yes. Exemptions are either Personal or Additional.

Sec. 35Personal Exemption:Fixed at P 50,000

Additional Exemption:Fixed at P 25, 000 per dependentUpto 4 dependents onlyDependents: Legitimate, illegitimate, legally adopted

child Chiefly dependent upon taxpayer Living with taxpayer Not more than 21 years old Unmarried Incapable of self-support Not gainfully employed

Here is more on that:

How do we compute for the

Income Tax a taxpayer ha to

pay?

To answer that, we have to know first the

formula.

X Tax RateTAXABLE INCOME

Gross Income- Deduction- Exemption

TAX DUE- Creditable Withholding Tax

TAX PAYABLE

The End.