Fundamentals of Accountancy, Business and Management 2 Module 6 PDF

NAME OF STUDENT: ____________________________________ SECTION: ____________________________________  Fundamentals of Accountancy, Business and Governor Pack Road, Baguio City, Philippines 2600 Man...

NAME OF STUDENT: ____________________________________ SECTION: ____________________________________  Fundamentals of Accountancy, Business and Governor Pack Road, Baguio City, Philippines 2600 Management 2 Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786; 442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Email: [email protected]; Website: www.uc-bcf.edu.ph MODULE 6- FABM 2 Subject Teacher: ARISTON JR. G. JAYME GENERAL PRINCIPLES AND CONCEPTS OF TAXATION Learning Objectives: At the end of this modules, students must be able to: a. Define taxation as an inherent power of the state; b. Explain taxation as a power, process, and means; c. Distinguish taxation from other inherent powers of the state; and d. Explain various principles governing taxation in the Philippines. Taxation, defined Taxation is one of the inherent powers of the state. From the moment a State is born, it automatically possesses the power to collect taxes from its inhabitants. Such power, being inherent, did not emanate from any laws. The Constitution of the Philippines does not confer to the state its power of taxation, but merely limits the exercise thereof. Taxes are enforced proportional contributions from the persons and property levied by the law-making body of the State by virtue of its sovereignty in support of government and for public needs. Attributes: 1. forced charge; 2. pecuniary burden payable in money; 3. levied by the legislature; 4. assessed with some reasonable rule of apportionment; (see theoretical justice) 5. imposed by the State within its jurisdiction; 6. levied for a public purpose. A. Taxation as a process. As a process, tax measures, before they can be enforced to the inhabitants, must undergo the process of legislative undertaking through levying (Tax Policy)); to be implemented by the executive branch of the government through assessment and collection (Tax Administration). Figure 1. The Process of Taxation LEGISLATIVE BRANCH EXECUTIVE BRANCH TAX POLICY TAX ADMINISTRATION LEVYING ASSESSMENT The legislative branch The executive branch, thru the Bureau of Internal of the government Revenues (BIR) appraises or determines the value of the passes tax laws or subject of taxation to determine the value of the tax ordinances (for local obligation. Generally, taxes are self-assessing. The government units). taxpayers will be allowed to determine the value of their tax obligations. COLLECTION The BIR, or other authorized collecting agents, such as banks, will facilitate the collection of the tax payments made by the taxpayer. B. Taxation as a means. As a means, taxation is the way as well as the source of government funds in order to support its functions. FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 1 of 7  Fundamentals of Accountancy, Business and Governor Pack Road, Baguio City, Philippines 2600 Management 2 Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786; 442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Email: [email protected]; Website: www.uc-bcf.edu.ph MODULE 6- FABM 2 Subject Teacher: ARISTON JR. G. JAYME Basic Principles of Sound Tax System 1. Fiscal Adequacy - sufficiency to meet government expenditures and other public needs. 2. Administrative Feasibility – capability of being effectively enforced. 3. Theoretical Justice – based on the taxpayer’s ability to pay; must be progressive. (Ability to Pay Theory) Requisites of a Valid Tax: 1. should be for a public purpose 2. the rule of taxation shall be uniform 3. that either the person or property taxed be within the jurisdiction of the taxing authority 4. that the assessment and collection of certain kinds of taxes guarantees against injustice to individuals, especially by way of notice and opportunity for hearing be provided. 5. the tax must not impinge on the inherent and Constitutional limitations on the power of taxation THEORIES OF TAXATION: Lifeblood Theory/ Bread and Butter Doctrine – The prompt and certain availability of taxes is essential to support the existence of a government. The government cannot exist without funds sourced through taxes, and thus, collection of taxes is a necessary burden to preserve State’s sovereignty. Without revenue raised from taxation, the government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. (CIR vs. ALGUE, G.R. No. L-28896 February 17, 1988) Necessity Theory – taxation is a necessary burden to fund the functions of the government that are required to maintain its sovereignty. Taxes are necessary to defray the expenses of the government. Benefits-Protection Theory – Reciprocal duties of protection and support between State and inhabitants. Inhabitants pay taxes and in return receive benefits and protection from the State. Symbiotic Relationship Theory – Taxation arises because of reciprocal relation of protection and support between the State and taxpayers. The State gives protection and for it to continue giving protection, it must be supported by the taxpayers in the form of taxes. (CIR vs. ALGUE, G.R. No. L- 28896 February 17, 1988) C. Taxation as a power. As a power, it co-exists with the creation of a state. The state shall demand contributions from its inhabitants in order to raise funds to the government, and thus, support governmental activities. The Three Inherent Powers of the State Alongside Taxation Power, the state also inherently possesses Police Power and the Power of Eminent Domain. The three inherent powers of the state are distinguished as follows: Figure 2. Inherent Powers of the State Taxation Police Power Eminent Domain Concept The power to enforce The power to make The power to take a contribution and/or and enact laws, rules, private property for collect funds from the regulations, or local public use, upon people to raise ordinances to promote payment of just government funds. the general welfare. compensation. Purpose To raise government To regulate activities; To take private funds to defray its To promote public properties for public expenditures. welfare use. FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 2 of 7  Fundamentals of Accountancy, Business and Governor Pack Road, Baguio City, Philippines 2600 Management 2 Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786; 442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Email: [email protected]; Website: www.uc-bcf.edu.ph MODULE 6- FABM 2 Subject Teacher: ARISTON JR. G. JAYME As to the Amount of No Limit Sufficient to cover the The owner is paid the Imposition costs of regulation. fair market value of the property expropriated. As to Compensation Compensation is the None. Compensation Just Compensation – protection and public here refers to the the full and fair improvements intangible, equivalent of the instituted by the altruistic feeling property taken. government for the that the individual has taxes paid. contributed to the public good. Branch of the Legislative Branch Legislative Branch Legislative Branch. government exercising **Also by private the power entities. Subjects of the Power Property, Liberty and To a particular private (Object/Persons Community or a Property, property of an affected) particular class of Community or a individual. individuals. particular class of individuals. As to the Non- Inferior to the “Non- Superior to the Superior and may Impairment Impairment Clause” of “Non-Impairment override the “Non- Clause/Relationship the Constitution. Clause” of the Impairment Clause” of with the Constitution Constitution the Constitution. The three inherent powers of the state are all necessary attributes of Sovereignty. Simply stated, no effective government will exist without these inherent powers of the state. While they operate to deprive or interfere with the private properties of the inhabitants, or the community at large, they are expected to bring compensatory equivalence in the form of government services or the welfare to the general public. Compensation or Set-Off: General Rule: Taxes cannot be the subject of compensation or set-off. Reasons: 1. lifeblood theory 2. taxes are not contractual obligation but arise out of duty to the government 3. the government and the taxpayer are not mutually creditors and debtors of each other. (Francia v. IAC) Exception: When both obligations are due and demandable as well as fully liquidated and all the requisites for a valid compensation are present, compensation takes place by operation of law. (Domingo v. Garlitos) Doctrine of Equitable Recoupment - not followed in the Philippines: A tax presently being assessed against a taxpayer which has prescribed may not be recouped or set- off against an overpaid tax the refund of which is also barred by prescription. It is against public policy since both parties are guilty of negligence. Purpose of Taxation Power A. Revenue Purpose This is the primary purpose of the power of taxation. It gives the government the right to demand and collect funds from the inhabitants of the state in order to raise funds which will FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 3 of 7  Fundamentals of Accountancy, Business and Governor Pack Road, Baguio City, Philippines 2600 Management 2 Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786; 442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Email: [email protected]; Website: www.uc-bcf.edu.ph MODULE 6- FABM 2 Subject Teacher: ARISTON JR. G. JAYME support its operations. The government projects and programs would necessarily need funds, which funds will be provided by its internal revenue. B. Regulatory Purpose As the sumptuary or secondary purpose, taxation works to regulate inflation, achieve economic and social stability, serve as key instrument for social control. Economic stability may be had through a protection mechanism in the international trade relations. For example, the government may impose tariff or customs duties to control the entry of imported products intended to be sold and compete with locally produced products of the country. C. Compensatory Purpose This is in consonance with the Benefits-received Principle. Under this principle, there exists a symbiotic relationship between the government and its inhabitants. The payment of taxes means helping the government to achieve its legitimate objectives: to serve the people for whose benefit taxes are collected. Therefore, as a way of the people to compensate the benefits provided by the government, taxes are paid. Escape from Taxation: Tax Evasion vs. Tax Avoidance The goal of the taxpayer in escaping taxation is to reduce the amount of tax liability. However, the taxpayer must be careful in applying the reduction in order for such act not to be considered a tax evasion. Tax Evasion refers to the unlawful means of evading or dodging tax payments. An example of which is a deliberate omission of a certain amount of sales from the records of the business. On the other hand, tax avoidance refers to the legitimate measures of reducing the tax liability. The law allows certain ways on how to reduce the amount of tax liability. An example of which is a claim for tax exemption. Tax exemption is a grant of immunity to pay taxes. In order to be exempted from paying taxes, however, the one claiming for exemption must prove and justify his qualification to be tax exempt. Other forms of tax avoidance may be in the form of tax options (applying varying tax rates allowed by law) or tax shifting (In case of VAT or OPTs). Classification of Taxes I. As to Who Bears the Burden A. Direct Taxes These are taxes demandable from persons, who by law, are bound to pay tax. Both the liability and the burden of paying tax falls on the same person. An example of a direct tax is an income tax. Income taxation will be discussed in the subsequent modules. B. Indirect Taxes As distinguished from direct taxes, the liability of paying the tax is on a particular person/ entity, but the tax burden may be shifted to another person/ entity. An example of an indirect tax are business taxes such as Value-added Tax (VAT) and Other Percentage Taxes (OPT). In practice, VAT and OPTs form part of the purchase price because the burden of paying the tax is shifted from the producer to the consumers. This is the reason why VAT and OPTs are called taxes on commodities. Business taxation will be discussed in the subsequent modules. II. As to subject matter: a) Personal, Capitation, or Poll tax – taxes are of fixed amount upon all persons of a certain class within the jurisdiction without regard to property, occupation or business in which they may be engaged. b) Property tax – assessed on property of a certain class. FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 4 of 7  Fundamentals of Accountancy, Business and Governor Pack Road, Baguio City, Philippines 2600 Management 2 Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786; 442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Email: [email protected]; Website: www.uc-bcf.edu.ph MODULE 6- FABM 2 Subject Teacher: ARISTON JR. G. JAYME c) Excise or Privilege tax – imposed on the exercise of a privilege. d) Custom Duties – duties charged upon the commodities on their being imported into or exported from a country. III. As to purpose: a) General, Fiscal or Revenue - levied for the general or ordinary purposes of the Government. b) Special or Regulatory - levied for special purposes. IV. As to graduation or rate: a) Proportional - based on a fixed proportion of the value of the property assessed. b) Progressive or graduated - rate or amount of tax increases as the amount of the income or earning to be taxed increases. c) Regressive - tax rate decreases as the amount of income to be taxed increases. Q: Is a tax law adopting a regressive system of taxation valid? A: Yes. The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. The Constitutional provision means simply that indirect taxes shall be minimized. The mandate to Congress is not to prescribe, but to evolve, a progressive tax system. (EVAT En Banc Resolution, Tolentino, et al. vs Secretary of Finance, October 30, 1995) V. As to Taxing Authority: a) National Tax - levied by the National Government. b) Local/Municipal Tax - levied by the local government. VI. As to scope: a) General b) Special VII. As to basis of amount a) Specific - the computation of the tax or the rates of the tax is already provided for by law. b) Ad Valorem - tax upon the value of the article or thing subject to taxation; the intervention of another party is needed for the computation of the tax. Double Taxation - taxing the same property twice when it should be taxed but once. Q: Is double taxation prohibited in the Philippines? A: No. There is no constitutional prohibition against double taxation. It is not favored but permissible. (Pepsi Cola Bottling Co. v. City of Butuan, 1968). Kinds: a. Indirect duplicate taxation – not legally objectionable. The absence of one or more of the elements/requisites makes the double taxation indirect. b. Direct duplicate taxation (obnoxious/unpleasant double taxation) – double taxation in the objectionable or prohibited sense. This constitutes a violation of substantive due process. Requisites: a) the same property or subject matter is taxed twice when it should be taxed only once. b) both taxes are levied for the same purpose c) imposed by the same taxing authority d) within the same jurisdiction e) during the same taxing period f) covering the same kind or character of tax. Situs of Taxation As a rule, taxation power is territorial. Therefore, tax laws may only be imposed within the Philippine Territory. The rule is applied in determining whether a person or a property must be FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 5 of 7  Fundamentals of Accountancy, Business and Governor Pack Road, Baguio City, Philippines 2600 Management 2 Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786; 442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Email: [email protected]; Website: www.uc-bcf.edu.ph MODULE 6- FABM 2 Subject Teacher: ARISTON JR. G. JAYME subjected to the tax laws of the Philippines. In applying the rule, it is important to consider the citizenship and residency of the taxpayer and the source or location of the object. Figure 3. Situs of Taxation for Individual Taxpayers Source of the Object of Tax Nature of Tax Citizenship Residency Within the Philippines Outside the Philippines Resident Taxable Taxable Filipino Nonresident Taxable Not taxable Income Tax Resident Taxable Not taxable Alien Nonresident Taxable Not taxable Business Tax Taxable Not taxable Figure 4. Situs of Taxation for Corporations Citizenship/ Source of the Object of Tax Nature of Tax Residency Within the Philippines Outside the Philippines Income Tax Domestic Taxable Taxable Resident Foreign Taxable Not taxable Business Tax Taxable Not taxable Classification of Taxpayers. The terms Filipino and Alien, Resident or Non-resident, and Domestic or Foreign Corporations will be defined in accordance with Sec. 22 of RA No. 8424 or the National Internal Revenue Code (NIRC) of the Philippines, as amended by RA No. 10963 or the Tax Reform for Acceleration and Inclusion Law (TRAIN Law). A. Resident Citizen - A Filipino who permanently resides or is domiciled in the Philippines. Under Section 1, Article IV of the 1987 Constitution, the following persons are citizens of the Philippines: 1. Those who are citizens of the Philippines at the time of the adoption of the 1987 Constitution; 2. Those whose fathers or mothers are citizens of the Philippines; 3. Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and 4. Those who are naturalized in accordance with law. B. Nonresident Citizen (Sec. 22 (E), NIRC) - The following are nonresident citizens: 1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein; 2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis; 3. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year; and 4. A citizen of who has been previously considered as nonresident and who arrives in the Philippines at any time during the taxable year with the intention to permanently reside in the Philippines, shall be treated as nonresident with respect to any income derived from abroad until his arrival in the Philippines; and FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 6 of 7  Fundamentals of Accountancy, Business and Governor Pack Road, Baguio City, Philippines 2600 Management 2 Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786; 442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Email: [email protected]; Website: www.uc-bcf.edu.ph MODULE 6- FABM 2 Subject Teacher: ARISTON JR. G. JAYME C. Resident Alien (Sec. 22 (F), NIRC) - An individual whose residence is within the Philippines and who is not a citizen thereof. D. Nonresident Alien (Sec. 22 (G), NIRC) - An individual whose residence is within the Philippines and who us not a citizen thereof. E. Domestic Corporation (Sec. 22 (C), NIRC) - Corporations created or organized in the Philippines under its laws. For purposes of taxation, the following are considered “corporations” (Sec. 22 (B), NIRC): 1. Partnerships, except General Professional Partnerships; 2. Joint-stock companies; 3. Joint accounts; 4. Associations; and 5. Insurance Companies. F. Foreign Corporation - Corporations created and organized under foreign laws. G. Resident Foreign Corporation (Sec. 22 (H), NIRC) - A foreign corporation engaged in trade or business within the Philippines. H. Nonresident Foreign Corporation (Sec. 22 (I), NIRC) - A foreign corporation not engaged in trade or business in the Philippines. References: a. Ballada, Win (2019). SHS 657 B2109 2019. Fundamentals of Accountancy, Business and Management-2. 2nd Edition. Sampaloc, Manila : DomDane Publishers, 2019. b. Ferrer, Rodiel and Millan, Zeus Vernon. (2017). Fundamentals of Accountancy, Business and Management 2. Baguio City: Bandolin Enterprise, 2017. c. Valencia, E, & Roxas, G. (2014). Income Taxation. Baguio City: Valencia Educational Supply. d. RA No. 8424, National Internal Revenue Code of the Philippines. e. RA No. 10963, Tax Reform for Acceleration and Inclusion Law - - - End of Module - - - FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 7 of 7