Overview of Taxation

Overview of Taxation

• Taxation is the state's inherent power to demand contributions from citizens.
• Taxation is the legislative process of imposing taxes for government revenue.
• Taxation allocates the financial burden of government expenses among the populace.

Inherent Powers of the State

• The three inherent powers are Police Power, Taxation, and Eminent Domain.
• Police Power enacts laws for public welfare.
• Taxation raises revenue for government functions.
• Eminent Domain acquires private property for public use with compensation.
• These powers are inherent and do not require constitutional endorsement.
• They can be exercised independently but are regulated by the constitution.
• These involve legislative actions that may interfere with private rights, requiring compensation.

Classification of Taxes

• National Taxes are imposed by the National Government (e.g., income tax, VAT).
• Local Taxes are imposed by Local Government Units (e.g., real estate tax, professional tax).
• Personal Taxes are fixed amounts on individuals (e.g., community tax).
• Property Taxes are imposed on property (e.g., real property tax).
• Excise Taxes are levied on specific goods (e.g., 'sin taxes').
• Direct Taxes cannot be shifted (e.g., income tax, estate tax).
• Indirect Taxes can be shifted (e.g., VAT, excise tax).
• Specific Taxes are fixed amounts based on quantity (e.g., excise tax on cigars).
• Ad Valorem Taxes are based on a percentage of value (e.g., VAT, income tax).

Elements of a Sound Tax System

• Fiscal Adequacy: Taxes must generate sufficient revenue for public services.
• Theoretical Justice/Equity: Taxation should consider the taxpayer's ability to pay.
• Administrative Feasibility: The tax system should be simple and understandable.

Inherent Limitations of Taxation

• Taxes must serve a public purpose, with private benefits being incidental.
• The power to impose taxes cannot be delegated.
• Taxes must be imposed within the taxing authority's jurisdiction.

Constitutional Limitations on Taxation

• Due Process: Tax laws must be valid and not unjustly confiscatory.
• Equal Protection: Tax laws must treat individuals equally under similar circumstances.
• Non-payment of poll tax cannot result in imprisonment.
• Laws cannot impair contract obligations without consent.
• Religious, charitable, and educational entities are exempt from real property tax.
• Revenue bills must originate exclusively from the House of Representatives.

Taxpayer and Property Classification

• Persons: Tax obligations are determined by the taxpayer's residence.
• Real Property: Taxed based on its physical location.
• Personal Property: Taxed at the place of sale or transaction.
• Intangible Property: Taxed at the owner's domicile, with exceptions for franchises, patents, copyrights, and trademarks.
• Receivables: Taxed based on the debtor's domicile or residence.
• Bank Deposits: Taxed at the location of the depositary bank.
• Income: Taxed where the occupation is engaged or where the transaction occurred.
• Business: Taxed at the place of business.
• Gratuitous Transfers: Taxed based on the residence/citizenship of the taxpayer or property location.

Overview of Individual Taxpayers

• Individual taxpayers are natural persons with income within the jurisdiction of a taxing authority.
• Classifications include Resident Citizens, Nonresident Citizens, Resident Aliens, and Nonresident Aliens.
• RA 11590 affects alien individuals employed by Offshore Gaming Licenses.
• Resident Citizens are citizens at the time of the 1987 Constitution's adoption or those who have Filipino parents.
• Nonresident Citizens are Filipino citizens with a permanent physical presence abroad.
• Overseas Contract Workers (OCWs) are nonresident citizens employed abroad and registered with POEA.

Aliens and Their Tax Classifications

• Resident Aliens reside in the Philippines for over 180 days and are not mere transients.
• They are taxed on income from both local and foreign sources.
• Nonresident Aliens are classified as engaged in trade or business or not.
• Aliens engaged in trade/business are present for over 180 days and derive income from local sources.
• Aliens not engaged in trade/business are present for 180 days or less and are taxed only on income sourced within the Philippines.

Scenarios and Tax Implications

• Mr. A, temporarily assigned in the US for the entire year, is classified as a Nonresident Citizen (NRC).
• Mr. B, temporarily assigned in the US for part of the year, is classified as a Resident Citizen (RC) for 2025.
• Mr. C, permanently assigned in the US, is classified as a Nonresident Citizen (NRC).
• Mr. D, who migrated to the US for over 10 years and returned, is classified as a Resident Citizen (RC) for 2025.
• Mr. E, with permanent work in the US, is classified as a Nonresident Citizen (NRC).
• Taxable income for Resident Citizens includes income from both local and foreign sources.
• Nonresident Citizens are taxed only on local income.
• Ordinary income includes compensation, business income, and passive income, subject to graduated tax rates.

Taxation of Self-Employed Individuals and Professionals

• Self-Employed Individuals (under RA 10963) are sole proprietors or independent contractors with self-employment income.
• They have control over their work and are not in an employer-employee relationship.
• Tax obligations include reporting gross income and allowable deductions.
• Professionals are certified individuals deriving income from their practice.
• Tax implications for professionals are similar to those for self-employed individuals, focusing on gross income and deductions.

Overview of Taxation for Self-Employed Professionals (SEPs)

• SEPs include entertainers, athletes, and consultants with taxable income.
• Income tax can be a graduated tax rate or a flat 8% on gross sales/receipts.
• SEPs are subject to a 12% VAT or a 1% percentage tax under the CREATE Act, unless exempt.
• The choice of tax rate depends on gross sales/receipts and other non-operating income not exceeding P3,000,000 for the 8% rate.
• SEPs must elect the 8% income tax in the first quarter of the taxable year, which is irrevocable.
• For the 8% preferential tax rate, gross sales/receipts must not exceed the VAT threshold of P3,000,000.
• The SEP must be non-VAT registered and not derive income from VAT-exempt sales.
• The SEP must not be subject to any other percentage tax aside from Section 116.
• Election for the 8% tax must be made in the first quarter of the taxable year.
• If gross sales exceed the VAT threshold, the SEP will automatically be subjected to graduated tax rates.

Tax Scenarios for SEPs

• Scenario 1: If gross sales are P2,800,000 with costs and expenses leading to a net income of P550,000, the tax due under the 8% option needs to be calculated.
• Scenario 2: For a mixed income scenario with compensation income of P900,000 and gross sales of P2,800,000, the tax implications must be analyzed.
• SEPs exceeding the VAT threshold must update their registration to VAT taxpayer within 30 days of the month the threshold is breached.
• Mixed income refers to income derived from both self-employment and compensation.
• Tax calculations must consider both income types and apply the appropriate tax rates.
• SEPs must maintain accurate records of their income sources to ensure compliance with tax regulations.

Passive Income Taxation

• Passive income includes earnings from sources such as interest, royalties, dividends, and prizes.
• Income from passive sources within the Philippines is subject to income tax. Income from outside is also taxed.
• The payor is primarily responsible for withholding tax on passive income, which is deducted before payment to the recipient.

STATUTORY MINIMUM WAGE EARNERS (MWE)

• Exempt from tax on the following compensation income: Minimum wage, Holiday pay, Hazard pay, Overtime pay, Night shift differential
• MWE with additional wage exempt with limit of 90k
• Fringe benefits are any goods, services, or other benefits furnished or granted by employer in cash or in kind
• Tax exempt fringe benefits contributions under SSS law, GSIS law, premiums for group insurance of employees.
• Monetary value of motor vehicles- employer owns and maintains motor for the use of business, employer leases, employer purchases vehicle on the name of employee, employer provides cash to purchase vehicle and named on the employee, employer purchases installment on the name of employee, employer shoulders a portion of amount and on the name of employee.
• Gross Up Monetary Value is Monetary value / nmonetary value factor (65%)
• FBT rate is 35%, NRA-NETB 25%

Expenses for Travel

• Expenses less than 300$/day are not subject to FBT
• Economy and Business class ticket are not subject to FBT
• First class ticket is subject to FBT
• Traveling expense of family member paid by employer is taxable
• Failure to substantiate that the travel is in relation to attending business meetings is subject to FBT
• DE MINIMIS BENEFITS such as entertainment, medical services are not considered as compensation subject to income tax if not exceeding 90k for the year.

Co-Ownership

• Two or more heirs or beneficiaries inherit an undivided property, from a decedent, donor makes a gift of undivided property in favor or two or more donees
• Co-Ownership is generally not taxable
• Co-Owners invest in the income in business, it is taxable as corporation

INCOME TAX OF AN ESTATE

• ESTATE is the mass of all property, rights and obligations of a deceased person which is not extinguished upon his death.
• Administration or settlement period is when title to property is not yet finally transferred to heirs or beneficiaries
• TRUSTS is the right on property, real or personal helped by one party for the benefit of another
• TRUSTOR/GRANTOR delivers part of all his properties
• TRUSTEE/FIDUCIARY administers and manages the properties for the beneficiaries

TAXABLE TO TRUSTEE IF:

• income is accumulated for future benefit, income of a trust administered in a foreign country

TAXABLE TO TRUSTOR IF;

• title of corpus maybe vested to grantor income that may be revested, income of trust may be held or distributed for benefit of grantor

TAXABLE TO BENEFICIARIES IF

• income is distributed to beneficiary, beneficiaries include in the return their distributive share in net income of trust
• ORDINARY TRUST - income ad corpus do not revent to grantor
• REVOCABLE TRUST- trust is vested
• EMPLOYEE’S TRUST- not taxable

CORPORATION

• Exclusions exist for General Professional Partnerships and Joint Ventures or Consortiums under certain conditions.
• General Professional Partnership - partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business
• Joint Venture or Consortium - commercial undertaking by two or more persons, differing from a partnership in that it relates to the disposition of a single lot of goods or the completion of a single project

Not included if:

• Formed for the purpose of undertaking construction project pursuant to P.D. No. 929 and,
• Purpose of undertaking a construction project
• Should involved joining/pooling of resources by licensed local contractors, licensed by PCAB
• Local contractors are engaged in construction business
• Joint venture must be licensed by PCAB
• those engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the government

Foreign Contractors conditions

• The member foreign contractor is covered by a special license as contractor by the PCAB
• The construction project is certified by the appropriate Tendering Agency that the project is a foreign financed/internationally-funded project and that international bidding is allowed under the Bilateral Agreement entered into by and between the Philippine Government and the foreign financial institution
• An artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence

Corporation includes:

• One-person corporations (OPC) - corporation with a single stockholder; provided that only a natural person, trust or an estate may form a one-person corporation
• Partnerships, no matter how created or organized
• Joint stock companies - group of individuals, acting jointly, establish and operate business enterprise under an artificial name, with an invested capital divided into transferable shares, and other corporate characteristics, but operating without formal government authority
• Joint Accounts - constituted when one interests himself in the business of another by contributing capital and sharing profits and losses
• Associations - all organizations which have substantially the salient features of a corporation
• Insurance companies - corporations engaged in the business of risk underwriting, including life, health, property and casualty insurance

CORPORATION Tax-Exempt Corporations

• Labor, agricultural or horticultural organizations not organized principally for profits
• A beneficiary, society, order or association, operating for the exclusive benefits of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident or other benefits exclusively to the members of such society, order, or association, or non-stock corporation or their dependents
• Cemetery company owned and operated exclusively for the benefits of its members
• Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or rehabilitation of veterans, no part of its net income or asset shall belong or inure to the benefit of any member, organizer, officer or specific person
• Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual
• Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare
• A non-stock nonprofit educational institution
• Government educational institution
• Farmers or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organizations of a purely local character, the income of which consists solely of assessments, dues and fees collected from members for the sole purpose of meeting its expenses, and
• Farmers, fruit growers, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back them the proceeds of sales, less the necessary selling on the basis of the quantity of produced finished by them.
• The income of whatever kind and character of the foregoing organizations from any of their properties, real or personal or from any of their activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax
• Passive income are types of income derived from sources within the Philippines that are subject to Final Withholding Taxes. It only includes interest income, royalties and dividends.
• Capital Gains income derived from sale of capital assets. It includes capital gains from sale of shares of stock