Principles of Taxation

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Questions and Answers

What is the meaning of the term 'incidental' in the context of VAT?

Something primarily intended for sale to customers

Something exempt from VAT

Something necessary, appertaining to or depending upon another (correct)

Something not related to the main business

What is the tax base of VAT on sale of properties?

12% based on the Selling Price (Gross) in the sales contract (correct)

12% based on the Zonal Value of the property

12% based on the Assessor's valuation of the property

12% based on the market value of the property

Which of the following transactions is subject to VAT?

Sale of a residential house by an individual

Sale of shares of stock by an investor

Importation of goods from abroad (correct)

Sale of a commercial building by a real estate dealer (correct)

What is the situs of VAT?

Place where the principal office of the business is located Signup and view all the answers

What are the requisites for the taxability of real properties under VAT?

The real property is held primarily for sale or for lease in the ordinary course of trade or business, and the seller is engaged in the real estate business Signup and view all the answers

Which of the following transactions is deemed a sale subject to VAT?

Retirement from business with respect to inventories on hand Signup and view all the answers

What is the rate of VAT on sale of properties?

12% of the gross selling price Signup and view all the answers

Which of the following is exempt from VAT?

Importation of goods for personal use Signup and view all the answers

What is the VAT computation on the sale of a mansion worth Php13,000,000.00?

Php13,000,000.00 ÷ 1.12 x 12% = Php 1,392,857.14 Signup and view all the answers

What happens if any of the requisites for the taxability of real properties under VAT are absent?

The transaction is exempt from VAT, but subject to percentage taxes Signup and view all the answers

What is the primary purpose of taxation?

To raise revenue to defray the necessary expenses of the government Signup and view all the answers

What is the nature of taxation in terms of sovereignty?

It is an inherent attribute of sovereignty Signup and view all the answers

What is the characteristic of taxation that refers to its unlimited scope?

Unlimited Signup and view all the answers

What is the strongest power of the government?

Power of Taxation Signup and view all the answers

What is the legal basis of the Tax Code of 1997 in the Philippines?

Republic Act No. 8424 Signup and view all the answers

What is the purpose of the Power of Police?

To regulate to promote public welfare Signup and view all the answers

What is the primary reason why the real estate dealer registers the business as a proprietorship instead of a corporation?

To pay lesser taxes Signup and view all the answers

What is the Tax Reform for Acceleration and Inclusion Act (TRAIN Law) also known as?

Republic Act No. 10963 Signup and view all the answers

What are the three inherent powers of the government?

Power of Taxation, Power of Eminent Domain, Power of Police Signup and view all the answers

What is the result of undervaluing the Total Contract Price in the contract submitted to the BIR?

The seller pays lesser tax Signup and view all the answers

What is the characteristic of Value Added Tax (VAT) that makes it transparent?

The amount of the tax is shown as a separate item in the VAT Invoice or receipt Signup and view all the answers

What is the formula to compute the VAT?

Total Amount ÷ 1.12 x 12% Signup and view all the answers

What principle is followed by the VAT in determining the taxation or exemption of goods?

Destination principle Signup and view all the answers

What are the conditions that must be satisfied for VAT to be charged?

There must be a sale, barter, exchange or lease, and the goods must be taxable Signup and view all the answers

What is the VAT threshold?

Php3,000,000.00 Signup and view all the answers

Who are persons liable to pay VAT?

Any person who sells, barters, exchanges, or leases goods or properties, or renders services Signup and view all the answers

What is meant by the phrase 'in the course of his trade or business'?

The regular conduct or pursuit of a commercial or an economic activity Signup and view all the answers

What is the term for the manner by which the input tax is shifted by the seller to the buyer and credited against the buyer's output taxes?

Tax credit method Signup and view all the answers

What is the main principle of a sound tax system that is based on the taxpayer's ability to pay?

Theoretical Justice Signup and view all the answers

Which theory states that the government has a right to compel all citizens and property within its limits to contribute?

Necessity Theory Signup and view all the answers

What is the type of double taxation that arises when the same property or subject matter is taxed twice for the same purpose by the same taxing authority?

Direct Duplicate Taxation Signup and view all the answers

What is the term for the transfer of the burden of tax by the original payer to another or someone else?

Shifting of Tax Burden Signup and view all the answers

What is the term for the illegal means of escaping taxation through the use of pretenses and forbidden devices?

Tax Evasion Signup and view all the answers

What is the power of the government to take private property for public purpose with payment of just compensation?

Eminent Domain Signup and view all the answers

Which principle of sound tax system ensures that tax laws must be capable of being effectively enforced with the least inconvenience to the taxpayer?

Administrative Feasibility Signup and view all the answers

What is the term for the exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income?

Tax Avoidance Signup and view all the answers

What is the type of taxation that arises when the same property or subject matter is taxed twice by the same taxing authority, but for different purposes?

Indirect Duplicate Taxation Signup and view all the answers

What is the main principle of a sound tax system that ensures that the government's revenue sources are sufficient to meet its expenditures and other public needs?

Fiscal Adequacy Signup and view all the answers

What is the result of Excess Percentage Tax computation?

₱2,000 Signup and view all the answers

Where can you file your BIR Form No. 2551Q?

At any Authorized Agent Banks (AAB) of the Revenue District Office (RDO) where you are registered Signup and view all the answers

What is the deadline for filing Form 2551Q for the 1st quarter?

On or before April 25 Signup and view all the answers

How can payment for Form 2551Q be made?

Either manually through AABs or electronically through various online channels Signup and view all the answers

What will happen if you fail to file and pay your quarterly percentage tax return on or before the deadline?

You will incur interest of 25% plus surcharge plus compromise fee Signup and view all the answers

What will happen if you willfully neglect to file the quarterly percentage tax within the prescribed period?

You will incur a surcharge of 25% plus surcharge plus compromise fee Signup and view all the answers

Can you file a separate return for your head office and for each branch?

Yes, you can file a separate return for your head office and for each branch Signup and view all the answers

What is the purpose of computing Excess Percentage Tax?

To determine the amount of tax credits available for future payments Signup and view all the answers

A lessor has multiple residential units for lease, with some units rented for Php15,000.00 or less per month and others for more than Php15,000.00 per month. Which of the following statements is true?

The gross receipts from rentals not exceeding Php15,000.00 per unit are exempt from VAT, and those exceeding Php15,000.00 per unit are subject to VAT if the aggregate annual gross receipts exceed Php3,000,000.00. Signup and view all the answers

Under the CREATE Law, what is the new percentage tax rate applicable until June 30, 2023?

1% Signup and view all the answers

A consultancy business earns less than Php3,000,000.00 annually and receives a quarterly income of Php180,000.00. What is the quarterly percentage tax payable?

Php1,800.00 Signup and view all the answers

If a person is exempt from VAT, what is the tax base and rate applicable?

Gross sales or receipts with a 3% rate Signup and view all the answers

When is the quarterly percentage tax filing and payment due?

Within 25 days after the end of each taxable quarter Signup and view all the answers

What is the purpose of the CREATE Law?

To assist businesses as a response to the pandemic with retroactive provisions and lower tax rates Signup and view all the answers

A lessor has multiple residential units for lease, with some units rented for Php15,000.00 or less per month and others for more than Php15,000.00 per month. Which of the following statements is true?

How do you compute the excess percentage tax?

By multiplying the amount tagged as PT010 by 1% Signup and view all the answers

What is the benefit of the CREATE Law for Percentage Tax filers?

A lower tax rate of 1% Signup and view all the answers

What is the tax rate applicable to gross sales or receipts if the aggregate annual gross receipts do not exceed Php3,000,000.00?

3% Signup and view all the answers

What is the basis for computing VAT in the installment basis of payment?

Each installment payment constructively received by the seller Signup and view all the answers

What is the deadline for filing the monthly VAT return?

20th day of the month following the close of the 1st two months of the quarter Signup and view all the answers

What is the VAT threshold for the sale of real properties beginning January 01, 2021?

Php2,000,000.00 Signup and view all the answers

What is exempt from the payment of VAT?

Services rendered by individuals pursuant to an employer-employee relationship Signup and view all the answers

Who are required to pay the percentage tax?

Persons or entities whose gross annual sales or receipts do not exceed Php3,000,000.00 Signup and view all the answers

What is the basis for the output tax on the deemed sale of properties?

The market value of the properties at the time of the occurrence of the transaction Signup and view all the answers

What is the VAT liability for the lease of residential units with a monthly rent of less than Php15,000.00?

Exempt from VAT Signup and view all the answers

What is the computation basis for the VAT liability of the sale of real properties?

The selling price of the property Signup and view all the answers

What is the rate of the value-added tax on the sale of services and use or lease of properties?

12% of the gross receipts Signup and view all the answers

What is the deadline for filing the quarterly VAT return?

25th day of the month following the close of the quarter Signup and view all the answers

What is included in the term 'gross receipts' for the purpose of computing the value-added tax?

The total amount of money or its equivalent, including the amount charged for materials supplied with the services and deposits and advanced payments Signup and view all the answers

What is the tax implication if an advance payment constitutes a prepaid rental?

It is taxable to the lessor in the month when received Signup and view all the answers

What is the VAT threshold for the sale of real properties beginning January 01, 2024?

Php3,199,200.00 Signup and view all the answers

What is the VAT liability for the sale of condominium units with a value of more than Php3,000,000.00?

Subject to VAT Signup and view all the answers

When is a sale considered an installment sale?

If the initial payments in the year of sale do not exceed 25% of the gross selling price Signup and view all the answers

What is the purpose of the security deposit in a lease of properties?

To ensure the faithful performance of the lessee's obligations Signup and view all the answers

What is the tax implication if the advance payment is a security deposit for the faithful performance of certain obligations of the lessee?

It is not subject to value-added tax Signup and view all the answers

What is the definition of 'sale or exchange of services' under Section 108 of the NIRC?

The performance of all kinds of services in the Philippines for a fee, remuneration or consideration Signup and view all the answers

What is excluded from the definition of 'residential unit'?

Lodging houses, inns and pension houses Signup and view all the answers

What determines the initial payments in the year of sale?

The downpayment made and all payments actually or constructively received during the year Signup and view all the answers

Study Notes

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.

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Description

Learn about the general principles of taxation, including its definition, nature, and laws such as the National Internal Revenue Code and Tax Reform for Acceleration and Inclusion Act. Understand how taxation works and its importance in governing a country.