Fundamentals Principles of Taxation PDF

FUNDAMENTALS PRINCIPLES OF TAXATION compel all its citizens and property within its limits to contribute. Taxation N...

FUNDAMENTALS PRINCIPLES OF TAXATION compel all its citizens and property within its limits to contribute. Taxation No Tax = No Government, paralyzed ➔ The process or means by which the sovereign ❖ Necessity Theory (independent state), through its law making body The power of taxation proceeds upon the (legislature), imposes burdens upon subjects and theory that the government is a necessity. objects within its jurisdiction for the purpose of As stated in the case of Phil. Guaranty Co., raising revenues to carry out the legitimate objects of Inc. v. Commissioner, is a power predicted government. upon necessity. ➔ The act of levying a tax to apportion the cost of A necessary burden to preserve the State’s government among those who, in some measure, are sovereignty and a means to give the citizenry privileged to enjoy its benefits and must therefore an army to resist aggression, a navy to bear its burdens. defend its shores from invasion, a corps of civil servants to serve, public improvements Aspects of Taxation for the enjoyment of the citizenry, and those 1. Levying - Legislative function which come within the State’s territory and 2. Assessment - Executive function facilities and protection which a government 3. Collection - Executive function is supposed to provide. PURPOSES OF TAXATION Basis of Taxation Primary: Revenue/Fiscal ❖ Benefits Received or Reciprocity Theory ➔ The primary purpose of taxation on the part of the The basis is the reciprocal duties of government is to provide funds or property with protection and support between the state which to promote the general welfare and the and its inhabitants. The state collects taxes protection of its citizens and to enable it to finance from the subjects of taxation in order that it its multifarious activities. may be able to perform the functions of Secondary: Regulatory government, The citizens, on the other hand, ➔ A device for regulation or control (implementation pay taxes in order that they may be secured of State’s police power) by means of which certain in the enjoyment of the benefits of organized effects or conditions envisioned by the government society. may be achieved such as: This theory spawned the Doctrine of a. Promotion of General Welfare Symbiotic Relationship which means, taxes b. Reduction of Social Inequality are what we pay for a civilized society. c. Economic Growth Three Inherent Powers of the State THEORY AND BASIS OF TAXATION 1. Power of Taxation - The power by which the state Theory of Taxation raises revenue to defray the necessary expenses of ❖ Lifeblood Doctrine the government. The power of taxation is essential because 2. Police Power - The power of the state for promoting the government can neither exist nor endure public welfare by restraining and regulating the use without taxation. “Taxes are the lifeblood of liberty and property. of the government and their prompt and 3. Power of Eminent Domain - The power of the state certain availability is an imperious need”. to acquire private property for public purpose upon The government cannot continue to perform payment of just compensation. its basic functions of serving and protecting its people without means to pay its expenses. Consequently, the state has the right to Similarities Among the Three Inherent Powers of the Essential Elements of a Tax State 1. It is an enforced contribution. 1. They are inherent in the State. 2. It is generally payable in money. 2. They exist independently of the constitution 3. It is proportionate in character. although the conditions for their exercise may be 4. It is levied on persons, property, or the exercise of a prescribed by the constitution. right or privilege (subjects or objects of taxation) 3. Ways by which the State interferes with private 5. It is levied by the law-making body of the state. rights and property. 6. It is levied for public 4. Legislative in nature and character. 5. Presuppose an equivalent compensation received, Nature/Characteristics of the State’s Power to Tax directly or indirectly, by the persons affected. 1. It is inherent in sovereignty. 2. It is legislative in nature. 3. Exemption of government entities, agencies, and Districts Among the Three Inherent Powers of the State instrumentalities. 4. International comity 5. Limitations to territorial jurisdiction. 6. Strongest among the inherent powers of the state. Classification of Taxes: 1. As to scope a. National - State b. Local - LGU - should have provisions. 2. As to Subject/Object Matter a. Personal, poll or capitation b. Property c. Excise 3. As to who bears the burden a. Direct b. Indirect 4. As to determination of amount a. Specific b. Ad Valorem 5. As to purpose a. Primary b. Secondary 6. As to graduation rate a. Proportional b. Progressive c. Regressive Elements of a Sound Tax System Nonresident Citizen of the Philippines 1. FIscal Adequacy Physical presence abroad with a definite intention to a. Sapat ang pondo ng government para reside therein: bayaran yung mga expenses niya. Leaves the Philippines during the taxable year to 2. Theoretical Justice or Equity reside abroad a. Ability to pay principles a. As an immigrant b. Proportionate in character b. For employment on a permanent basis 3. Administrative Feasibility c. For work and derives income from abroad a. Tax laws should be simple and maayos whose employment threat requires him to be physically abroad most of the time during the Limitations taxable year. 1. Inherent Limitations Stayed outside the Philippines for an aggregate 2. Constitutional Limitations period of 183 days or more by the end of the year. a. Due process of Law i. Valid law and measure should not be Resident Citizen of the Philippines unconstitutional and unjust. A Filipino citizen taxpayer not classified as a b. Equal protection of Law nonresident citizen is considered a resident citizen c. Rule of Uniformity and Equity for tax purposes. Tax Evasion - Illegal Alien Tax Avoidance - Legal A foreign-born person who is not qualified to acquire Philippine citizenship by birth or after birth. Income Tax individuals Individual Taxpayers Resident Aliens Natural persons with income derived from within the An alien whose residence is within the Philippines territorial jurisdiction of a taxing authority. and who is not a citizen thereof 1. Resident Citizen Actually present in the Philippines and who are not 2. Nonresident Citizen mere transients or sojourners (temporary resident). 3. Resident Alien Lives in the Philippines with no definite intention as 4. Nonresident Alien to his stay. a. Engaged in Trade (NRA-ETB) Comes to the Philippines for the purpose that b. Nonresident Aliens not Engaged in Trade requires extended stay for its accomplishment. or Business (NRA-ETB) Nonresident Aliens Citizen of the Philippines An individual whose residence is not in the Those who are citizens of the Philippines at the time Philippines and who is not a citizen thereof. of the adoption of the 1987 Philippine Constitution. Aliens who come to the Philippines for a definite Those whose fathers or mothers are citizens of the purpose, which in its nature may be promptly Philippines. accomplished. Those born before January 17, 1973, of FIlipino mothers, who elect Philippine citizenship upon Nonresident Aliens Engaged in Trade or Business reaching the age of maturity. (NRA-ETB) Those who are naturalized in accordance with law. An alien who stayed in the Philippines for an aggregate period of more than 180 days during the taxable year and/or aliens who have business income in the Philippines.  “Trade or Business” Include performance of the self-employment. Not under an employer-employee functions of a public office or performance of contract. personal services in the Philippines (except Professional - a person formally certified by a performance of services by the taxpayer as an professional body belonging to a specific profession employee) by virtue of having completed a required course of studies and/or practice, whose competence can Nonresident Aliens Not Engaged in Trade or Business usually be measured against an established set of (NRA-NETB) standards. An alien who stayed in the Philippines for only 180 Income derived from self-employment is considered days or less, or who is not deriving business income income derived from the conduct of trade or in the Philippines. business, hence, classified as regular or ordinary income. Requisites to Avail the 8% Preferential Tax Rate Shall satisfy all the following conditions 1. The SEP shall be non-VAT registered. 2. Gross sales and other non-operating income must not exceed the VAT threshold of P3,000,000 3. The gross sales were not derived from Types of Income Taxes and Applicable Income Taxes VAT-exempt sales and transactions. 4. The SEP is not subject to Percentage Tax other than under Section 116 of the tax code, as amended. 5. Signifies his intention to elect the 8% income tax. Types of Income Earners 1. Purely Compensation Income Earner 2. Self-employed and Professionals 3. Mixed Income Earner Self-Employed and Professionals Self-employed - A sole proprietor or an independent contractor who reports income earned from Minimum Wage Earners 2. Sale of real properties classified as capital assets A worker in the private sector paid the statutory located in the Philippines is subject to 6% CGT. minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he is assigned. Exempt from income tax on: 1. Minimum wage 3. Sale of Real Property to the Government 2. Holiday Pay ○ The taxpayer has the option to be taxed at 3. Overtime Pay 6% CGT or basic income tax using the 4. Night Shift Differential graduated tax rate. 5. Hazard Pay If an MWE earns an additional business income, that Exemption from Capital Gains Tax income is subject to basic tax. Sale of Principal Residence ○ Requisites: Ordinary Assets 1. The proceeds are fully utilized in acquiring or 1. Stock in trade of the taxpayer or other property of a constructing a new principal residence within kin which would properly be included in the 18 calendar months from the date of inventory of the taxpayer if on hand at the close of acquisition. the taxable year. 2. Property used in trade or business subject to depreciation. 3. Real property held by the taxpayer primarily for sale to customers in the ordinary course of trade or 2. The historical cost or adjusted basis of the business. real property sold or disposed shall be carried 4. Real property used in trade or business of the over to the new principal residence built or taxpayer. acquired. 3. The BIR shall have been duly notified by the Capital Assets taxpayer within 30 days from the date of sale 1. Include all other property held by the taxpayer or disposition through a prescribed return of (whether or not connected with his trade) not his intention to avail of the tax exemption. included in the definition of ordinary assets. Sale of Capital Assets Subject to CGT 1. Capital gain on sale of shares of stocks of a closely-held domestic corporation (not traded in the local stock exchange) is subject to 15% CGT  1. Cash and/or property dividends actually/constructively received from a domestic corporation or from a joint stock company, insurance or mutual fund companies and ROHQ of multinational companies. 2. Share of an individual in the distributed net income after tax of a partnership other than a general professional partnership. 3. Share of an individual in the net income after tax of an Association, a Joint Account, or a Joint Venture Final Withholding Tax on Passive Incomes Derived from or Consortium taxable as a corporation, of which he Philippines Sources is a member of a co-venturer. Interest Income Earned from may be Subject to FWT Creditable WIthholding Tax vs Final Withholding Tax 1. Bank Deposit Under the FWT system, payee received the income 2. Deposit Substitutes net of the applicable tax. The amount of tax withheld 3. Trust Fund by the withholding agent (payor) is “constituted as 4. Mutual Fund full and final payment” of the income tax due from 5. Other Similar Arrangements the payee of the said income. 6. Foreign Currency Deposit System (FCDS) CWT is not an internal revenue tax but a method of collecting income tax in “advance” from the Deposit Substitutes recipient of income through the payor thereof, which Alternative form of obtaining funds from the public is constituted by law as the withholding agent of the other than deposits, through the issuance, governments. Taxes withheld on certain payments endorsements, or acceptance of debt instruments for are intended to equal or at least approximate the tax the borrower's own account, for the purpose of due of the payee on said income computed using the re-lending or purchasing of receivables and other graduated tax rate. obligations, or financing their own needs or the needs of their agent dealer. Public means borrowing from 20 or more individual or corporate lenders at any one time. Long-term Deposit or Investment Certificates Certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity Persons Required to File Income Tax Return period not less than 5 years, the form of which shall 1. Individuals engaged in business and/or practice of be prescribed by BSP and issued by banks only to profession, regardless of the results of operations. individuals in denominations of 10,000 and other 2. Individuals deriving compensation from two or more denominations as prescribed by BSP. employers concurrently or successively at any time Pre-termination of Long-term during the taxable year. ○ 4yrs to