General Principles of Taxation

General Principles of Taxation

• Taxation is the power of the sovereign to raise revenue to defray the necessary expenses of the government.
• It is a way of apportioning the costs of government among those who enjoy its benefits and must bear its burdens.
• National Internal Revenue Code (NIRC) is the Tax Code of 1997 of the Philippines (Republic Act No. 8424).
• Tax Reform for Acceleration and Inclusion Act (TRAIN Law) is Republic Act No. 10963.

Nature of Taxation

• It is an inherent attribute of sovereignty.
• It is legislative in character.

Characteristics of Taxation

• Comprehensive: it covers persons, businesses, activities, professions, rights, and privileges.
• Unlimited: the power to impose taxes is unlimited in force and extent.
• Plenary: it is complete.
• Supreme: it is the strongest of all the powers of the government.

Inherent Powers of the Government

• Power of Taxation: the power to raise revenue to defray the necessary expenses of the government.
• Police Power: the power to regulate to promote public welfare.
• Power of Eminent Domain: the power to take private property for public purpose with payment of just compensation.

Principles of Sound Tax System

• Fiscal Adequacy: sources of government revenue must be sufficient to meet government expenditures and other public needs.
• Administrative Feasibility: tax laws must be capable of being effectively enforced with the least inconvenience to the taxpayer.
• Theoretical Justice: a sound tax system must be based on the taxpayer's ability to pay.

Theory and Basis of Taxation

• Lifeblood Theory: without revenue raised from taxation, the government will not survive.
• Necessity Theory: the existence of the government is a necessity; it cannot continue without a means to pay its expenses.
• Benefits-Protection Theory: the state demands and receives taxes from the subjects of taxation within its jurisdiction to secure the enjoyment of the benefits of organized society.

Double Taxation

• Direct Duplicate Taxation: taxing the same subject or object twice by the same taxing power within the same taxable period for the same purpose.
• Indirect Duplicate Taxation: the permissible kind of double taxation that arises in the absence of one or more elements of direct double taxation.

Forms of Escape from Taxation

• Shifting of Tax Burden: the transfer of the burden of tax by the original payer to another or someone else.
• Tax Avoidance: the exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income.
• Tax Evasion: an illegal means of escaping taxation through fraud, pretenses, and forbidden devices.

Business Taxes

• Value-Added Tax (VAT)
  • Characteristics:
    • It is an indirect tax.
    • It is a tax on the value added of a taxpayer.
    • It is a transparent form of sales tax.
    • It is collected through the tax credit method.
  • How to compute: Total Amount ÷ 1.12 x 12% = VAT
  • Destination Principle: the destination of the goods determines taxation or exemption from tax.

VAT on Sale of Properties

• The tax base of VAT on sale of properties is 12% based on the selling price (gross) in the sales contract.
• Situs (place of taxation) of VAT: the place where the principal office of the business is located.
• Requisites for taxability (VAT) of real properties:
  • The seller executes a deed of sale, including dacion en pago, barter or exchange, assignment, transfer or conveyance or merely contract to sell involving real property.
  • The real property is located within the Philippines.
  • The seller or transferor is engaged in the real estate business.
  • The real property is held primarily for sale or for lease in the ordinary course of his trade or business.
  • The sale is not exempt from VAT under any law.

VAT on Sale of Service and Use or Lease of Properties

• The tax base of VAT on sale of service and use or lease of properties is 12% based on the gross receipts derived from the sale or exchange of services, including the use or lease of properties.

• Gross receipts mean the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person.

• The time of payment will depend on whether a sale is an installment sale or a deferred payment sale.

• Transactions exempt from the payment of VAT:

  • Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business.
  • Sale of real properties utilized for socialized housing.
  • House and lot/other dwellings valued at less than Php2,000,000.00 (beginning January 01, 2021).
  • Services rendered by individuals pursuant to an employer-employee relationship.
  • Lease of residential units wherein the monthly rent is less than Php15,000.00 (beginning January 01, 2021).### VAT Exemptions

• Gross receipts from rentals not exceeding ₱15,000.00 per unit are exempt from VAT, regardless of the aggregate annual gross receipts.

• Gross receipts from rentals not exceeding ₱15,000.00 per unit are also exempt from the 3% percentage tax.

VAT Conditions

• Gross receipts from rentals exceeding ₱15,000.00 per month per unit are subject to VAT if the aggregate annual gross receipts from said units only exceeds ₱3,000,000.00.
• Otherwise, the gross receipts will be subject to 3% percentage tax.

Condominium Units

• Condominium dues and association dues are subject to specific tax rules.

Percentage Tax

• A business tax imposed on persons or entities who sell or lease goods, properties or services in the course of trade or business whose gross annual sales or receipts do not exceed ₱3,000,000.00.
• Required to be paid by:
• Persons who are not VAT-registered, who sell or lease goods, properties or services in the course of trade or business whose gross annual sales or receipts do not exceed ₱3,000,000.00 and are exempt from VAT.
• Persons who lease residential units with varying rental fees.

CREATE Law

• Comprehensive Recovery and Tax Incentives for Enterprises (CREATE) is a law that seeks to assist businesses as a response to the pandemic with retroactive provisions and lower tax rates.
• The law benefits Percentage Tax filers with a new 1% tax rate, effective until June 30, 2023.

Quarterly Percentage Tax Calculation

• Calculated by multiplying 1% to quarterly gross sales or receipts.
• Formula: Quarterly Percentage Tax Due = Gross Receipts x 1%

Excess Percentage Tax Computation

• Applies to 2020 Q3 and Q4 filings.
• Computed by checking 2551Q filings and multiplying the amounts tagged as PT010 by 1%.
• Excess Percentage Tax = 3% Amount - 1% Amount.

Filing and Payment

• BIR Form 2551Q should be filed and paid within 25 days after the end of each taxable quarter.
• Can be filed with any Authorized Agent Banks (AAB) of the Revenue District Office (RDO) or with the Revenue Collection Officer (RCO).
• Can also be paid and submitted online.

Deadlines for Filing Form 2551Q in 2021

• 1st Quarter: April 25
• 2nd Quarter: July 25
• 3rd Quarter: October 25
• 4th Quarter: January 25

Penalties for Failure of Filing

• Failure to file and pay quarterly percentage tax return on or before the deadline incurs interest of 25% plus surcharge plus compromise fee.
• Willful neglect or false and fraudulent returns incur a surcharge of 25% plus surcharge plus compromise fee.