Taxation 2020 PDF

TAXATION Concept, nature and characteristics of taxation and Taxes Don’t be anxious, smile.  What is Taxation? It is the inherent power by which the sovereign state imposes financial burden upon persons and property as a means of raising revenues in order to defray the necessary expe...

TAXATION Concept, nature and characteristics of taxation and Taxes Don’t be anxious, smile.  What is Taxation? It is the inherent power by which the sovereign state imposes financial burden upon persons and property as a means of raising revenues in order to defray the necessary expenses of the government (Tax Digest by Crescencio Co Untian, 2002). Taxation is the imposition of financial charges or other levies, upon a taxpayer (an individual or legal entity) by a state such that failure to pay is punishable by law. What is Taxation? It is a mode by which government make exactions for revenue in order to support their existence and carry out their legitimate objectives (Tax Law and Jurisprudence by Justice Vitug, 2000). It is the most pervasive and the strongest of all the powers of the government. Taxes are the lifeblood of the government, without which, it cannot subsist. What is Tax? Ta x e s a r e t h e e n f o r c e d proportional contributions from persons or property levied by the law-making body of the state by virtue of its sovereignty for the support of the government and all public needs.  The first known system of taxation was in Ancient Egypt around 3000 BC - 2800 BC in the first dynasty of the Old Kingdom. In Biblical times, tax is already prevalent. According to Genesis 47:24: "But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children".  Earliest taxes in Rome are called as portoria were customs duties on imports and exports Augustus Caesar introduced the inheritance tax to provide retirement funds for the military. The tax was five percent on all inheritances except gifts to children and spouses. In England, taxes were first used as emergency measures. History of Taxation in the Philippines The pre-colonial society, being communitarian, did not have taxes. History of Taxation in the Philippines During the Spanish Period, new income- generating means were introduced by the government such as the : Manila-Acapulco Galleon Trade Polo Y Servicio (Forced Labor) Bandala Encomienda System Tribute History of Taxation in the Philippines Manila-Acapulco Galleon Trade was the main source of income for the colony during its early years. The Galleon trade brought silver from Nueva Castilla and silk from China by way of Manila. History of Taxation in the Philippines Polo Y Servicio is the forced labor for 40 days, of men ranging from 16 to 60 years of age who were obligated to give personal services to community projects. One could be exempted from the polo by paying a fee called falla (which was worth one and a half real). Bandala is one of the taxes collected from the Filipinos. It comes from the Tagalog word mandala, which is a round stock of rice stalks to be threshed. History of Taxation in the Philippines Encomienda are large tracts of land given to a person as reward for a meritorious act. The encomenderos were given full authority to manage the encomienda by collecting tribute from the inhabitants and govern people living on it. Tribute was the residence tax during the Spanish times. It may be paid in cash or kind, partly, or wholly. But in 1884, the tribute was replaced by the cedula personal or personal identity paper, equivalent to the present community tax certificate.  Did you know? That in the 19th century, the “cedula” served as an identification card that had to be carried at all times. A person who could not present his or her cedula to a guardia civil could then be detained for being “indocumentado”. Andres Bonifacio and other Katipuneros tore their cedulas in August 1896, signaling the start of the Philippine Revolution. The Development of the Community Tax The cédula was imposed by the Americans on January 1, 1940, when Commonwealth Act No. 465 went into effect, mandating the imposition of a base residence tax of fifty centavos and an additional tax of one peso based on factors such as income and real estate holdings. The payment of this tax would merit the issue of a residence certificate. Corporations were also subject to the residence tax. A sample cedula in the 1920s. What is a “cedula”? Also known as a “residence certificate”, is a legal identity document in the Philippines. Issued by cities and municipalities to all persons that have reached the age of majority and upon payment of a community tax, it is considered as a primary form of identification in the Philippines and is one of the closest single documents the Philippines has to a national system of identification, akin to a driver's license and a passport.  Why is “cedula” important? A person is required to present a cedula when he or she acknowledges a document before a notary public; takes an oath of office upon election or appointment to a government position; receives a license, certificate or permit from a public authority; pays a tax or fee; receives money from a public fund; transacts official business; or receives salary from a person or corporation.  The Four R’s of Taxation Taxation has four main purposes or effects: 1. Revenue 2. Redistribution 3. Repricing 4. Representation The Four R’s of Taxation Revenue The taxes raise money to spend on armies, roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems.  The Four R’s of Taxation Redistribution This refers to the transferring wealth from the richer sections of society to poorer sections. Repricing Taxes are levied to address externalities; for example, tobacco is taxed to discourage smoking, and a carbon tax discourages use of carbon-based fuels. What is a “cedula”? Representation As what goes with the slogan "no taxation without representation" , it implies that: rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain.  Other Purposes and Objective Regulation –Taxation also has a regulatory purpose as in the case of taxes levied on exercises or privileges like those imposed on tobacco and alcoholic products, or amusement places like night clubs, cabarets, cockpits, etc.  Other Purposes and Objective Regulation –A r e g u l a t o r y p u r p o s e i n t h e rehabilitation and stabilization of a threatened industry which is affected with public interest, like oil industry..  Other Purposes and Objective Promotion of General welfare –The Supreme Court ruled that taxation may be used as in implement of the police power in order to promote the general welfare of the people.  Other Purposes and Objective Promotion of General welfare –While the funds collected under the Oil Price Stabilization Fund (OSPF) may be referred to as taxes, they are exacted in the exercise of the police power of the State.  Other Purposes and Objective Promotion of General welfare –From such fund, amounts are drawn to reimburse oil companies when a p p ro p r i ate s i t u at i o n s a r i s e fo r increases in the cost of crude oil importation.  Other Purposes and Objective Reduction of Social Inequality –This is made possible through the progressive system of taxation where the objective is to prevent the undue concentration of wealth in the hands of a few individuals.  Other Purposes and Objective Reduction of Social Inequality –Progressivity is key stoned on the principle that those who are able to pay should shoulder the bigger portion of the tax burden.  Other Purposes and Objective Reduction of Social Inequality –Incidentally, The present rates of income, estate and gift taxes present a good example of progressivity.  Other Purposes and Objective Encourage Economic Growth –In the realm of tax exemptions and tax reliefs, for instance, the purpose is to grant incentives or exemptions in order to encourage investments and thereby promote the country's economic growth  Other Purposes and Objective Encourage Economic Growth –It is also worthwhile to note that the power to exempt from tax is inherent in the State.  Purposes and Objective Encourage Economic Growth –However, It is significant to note that with respect to real property taxes, no such power exists, save in the case of condonation of taxes which can be granted only for certain justifiable reasons which are expressly stated in law  Other Purposes and Objective Protectionism –In some important sectors of the economy, as in the case of foreign i m p o r t a t i o n s , t a xe s s o m e t i m e s provides protection to local industries like protective tariffs customs duties.  Why Tax? The main purpose of taxation is to accumulate funds for the functioning of the government machineries. No government in the world can run its administrative office without funds and it has no such system incorporated in itself to generate profit from its functioning. The government’s ability to serve the people depends upon the taxes that are collected. Taxes are indispensable in the government operation and without it, the government will be paralyzed. 1. It is an enforced contribution 2. It is generally payable in money 3. It is proportionate in character 4. It is levied on persons or property 5. It is levied by the state which has jurisdiction over the person or property 6. It is levied by the law-making body of the state 7. It is levied for public purpose THEORY OF TAXATION “LIFEBLOOD THEORY” like blood which acts as a support to every human organ so it could perform every duty inside the body, tax acts as the blood which supports government and state. BASIS OF TAXATION “BENEFITS-RECEIVED PRINCIPLE” reciprocal duties of protection and support between the state and its inhabitants Some of the many functions of the government include expenditures on war, the enforcement of law and public order, protection of property, economic infrastructure (roads, enforcement of contracts, etc.), public works, social engineering, and the operation of government itself. Commissioner vs. Algue, Inc. 1. It is inherent in sovereignty 2. It is legislative in character 3. It is subject to constitutional and inherent limitations 2. Assessment/collection of tax (executive function) 3. Payment Stage -this particular phase of taxation is incidental to the whole process, since this involves taxpayer’s compliance to the requirements and employment of available remedies. 1. subjects/objects to be taxed 2. purpose of the tax 3. amount/rate of the tax 4. manner and means of collection of the tax 1. FISCAL ADEQUACY - the sources of revenue should be sufficient to meet the demands of public expenditures 2. EQUALITY/THEORETICAL JUSTICE - tax burden should be in proportion to the taxpayer’s ability to p 3. ADMINISTRATIVE FEASIBILITY - tax laws should be capable of convenient, just and effective administration LIMITATIONS ON THE POWER OF TAXATION  Constitutional limitations  Inherent limitations  CONSTITUTIONAL LIMITATIONS Due process of law Equal protection of the laws Rule of uniformity and equity in taxation No imprisonment for non-payment of a poll tax Non-impairment of the obligation of contracts Non-infringement o f r e l ig io us  Exemption of religious, charitable, and educational entities, non-profit cemeteries, and churches from property tax. No appropriation for religious purposes. Exemption of non-stock, non- profit educational institution from taxation 1. DUE PROCESS OF LAW “No person shall be deprived of life, liberty, or property without due process of law…” (Art. III, Sec. 1, 1987 Phil. Constitution) The 1987 Philippine Constitution states that life, liberty or property cannot be taken unless the established procedures prescribed by law have been followed.  Deprivation of life, liberty or property, therefore, is not allowed unless: a. There is a law not contrary to the constitution authorizing such deprivation; b. The prescribed procedures in the deprivation must have been followed. ILLUSTRATION  During the current taxable year, Mr. Kang Khong was declared delinquent for non-payment of taxes amounting to P1 million. To effect the payment, his personal and real properties were seized or foreclosed by the government without giving him a proper notice.  Query: Was there observance of due process of law?  Answer: No, there was no observance of due process of law. Although there is a law to effect the collection of taxes, the process adopted to collect them was not in accordance with the required procedures. The taxpayer should have been given first a notice and an opportunity to contest his tax liability before his properties were seized. 2. EQUAL PROTECTION OF THE LAW  “No person shall be deprived of life, liberty, or property without due process of law nor shall any person be denied the equal protection of the laws.” (Art. III, Sec. 1, 1987 Phil. Constitution)  All persons are treated alike under the same circumstances, and there shall be no discrimination in the implementation of taxation laws.  Pe r s o n s o r p r o p e r t i e s t h a t a r e different relative to tax classification should be treated differently. Thus, different tax rates will apply to different classification of persons, income and properties.  Wh a t t h e l a w p r o h i b i t s i s c l a s s legislation that favors some and discriminates against others within the same class. ILLUSTRATION The City Council of Cebu recently passed an ordinance imposing a street tax on motor vehicles using the various streets of the city. As provided by the ordinance, the street tax is payable by vehicle owners who reside in Cebu City. Query: Does the ordinance violate the equal protection clause of the constitution?  Answer: Yes. The city ordinance does not impose tax on motor vehicles owned by a non-resident using the various streets of the city. All street users are classified under the same class; hence, all should be covered by the said street tax, regardless of whether they are residents of Cebu City or not. 3. No imprisonment for non- payment of poll tax  Poll tax is a kind of tax imposed upon certain class of persons residing within a territorial jurisdiction, regardless of property, profession or occupation. An example is the community tax.  No person shall be imprisoned for debt or non-payment of poll tax. ( A r t. I I I , S e c. 2 0 , 1 9 8 7 Ph i l. Constitution)  The constitutional provision specifically states that non-payment of poll tax is not subject to imprisonment. Non- payment, of other types of taxes, therefore, is subject to imprisonment. 4. Rules of taxation shall be uniform and equitable.  “ The rule of taxation shall be uniform and equitable. Congress shall evolve a progressive system of taxation.” (1987 Phil. Constitution, Art. VI, Sec. 28)  Uniformity taxation simply means that all subjects of taxation under the same class  Equitable taxation means that the tax shall be based on the ability of the individual to pay. The more income an individual earns, the more tax shall be collected from him/her.  Progressive system of taxation is a system wherein direct taxes are given preference over indirect taxes. It applies progressing tax rates as the tax base increases. ILLUSTRATION  Mr. Phak Yao, a resident of General Santos City, had a taxable business income of P1.5 million from his buy and sell business during the current taxable year. Meanwhile, his close friend, Mr. Chavit Cinco, a resident of Ilocos Sur, had a compensation income also of P1.5 million earned from Vigan City Government.  Query: Can Mr. Chavit challenge the non- application of the rules on uniformity and equity of taxation by asserting that his compensation income should be taxed differently from Phak Yao’s business income?  Answer: No. Both the business and compensation income are of the same amount of P1.5 million; thus, both will be imposed with the same tax rate. However, if the amount of taxable business income differs from that of compensation income, then different tax rate will be applied. 5. No money shall be appropriated for religious or private purposes.  “No public money or property shall be appropriated, applied, paid or employed, directly or indirectly, for the use, benefit or support of any sect, church, denomination, sectarian, institution or system of religion…”(Art. VI, Sec. 29(2), 1987 Phil. Constitution)  Appropriation is a budgetary act of setting government funds for a particular object of expenditures.  The Philippine Constitution strictly prohibits enactment of taxation laws or spending government funds to support religious activities. 6. Exemption from property taxation of charitable institutions, churches, educational entities, convents, non-profit cemeteries.  “Charitable institutions, churches, parsonages or convents, appurtenants thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable or educational purposes shall be exempted from taxation.” (Art. VI, Sec. 28 (3), 1987 Phil. Constitution)  INHERENT LIMITATIONS  Requirement that levy must be for public purpose  Non-delegation of the legislative power to tax Exemption from taxation of government entities  International comity  Territorial jurisdiction 1. FOR PUBLIC PURPOSE  Taxation laws and ordinances are intended for public purpose like promotion of the general welfare, financing legitimate government infrastructure projects, financial assistance to victims of calamities, and financial support to defense and security of the State. When a tax is for a public purpose:  1. If for the welfare of the nation or greater portion of the population.  2. it affects the area as a community rather than as individuals.  3. Is designed to support the services of the government for some of the recognized objects of the country. Stated otherwise, the revenues collected from taxation should be devoted to achieve the purposes of government. ILLUSTRATION  A statute is enacted levying a tax of P100.00 annually on every inhabitant of the Philippines above 21 years of age, the proceeds of which are earmarked for the support of the public educational system. The statute is assailed by a taxpayer on the ground, among others, that he does not send and has never sent any of his children to public schools, but only to exclusive private local and foreign schools. Decide with reasons. Answer:  The tax law is valid. An individual need not derive direct benefits from the tax because the paramount consideration is the welfare of the greater portion of the population. The legislature has the right to select the subjects of taxation because of the lifeblood doctrine, so long as there is valid classification. 2. NON-DELEGATION OF POWER TO TAX  The power of taxation is vested in the legislative branch of the government.  Taxation generally has two major phases: the legislative phase which refers to the making of taxation laws; and the administrative phase that refers to the assessment and collection of taxes  The legislative aspect of taxation cannot be delegated by the legislative body to the two other branches of the government- executive and judiciary. ILLUSTRATION  An ordinance of Talisay City on the operation of its market stall fees created a market committee “to formulate, recommend and adopt subject to the ratification of the Sangguniang Panlunsod and approval by the city mayor, policies and rules in the operation of the market stalls.” Is the creation of the committee a violation of the rule of non-delegation of the legislative power of taxation? Answer:  No, because the authority to make the law has not been delegated. This is clear from the requirement that the recommendations of the market committee are subject t o t h e ra t i f i c a t i o n o f t h e Sangguniang Panlunsod and approval by the City Mayor. 3. EXEMPTION OF GOVERNMENT ENTITIES FROM TAXATION  The different government agencies like the Department of Health (DOH), Department of Tourism (DOT), Department of National Defense (DND), and various LGU’s (provinces, cities and municipalities, and barangays) are exempted from taxation. 4. INTERNATIONAL COMITY  There exists equality among states under international law. States extend friendly relations, interactions, and respect between them. This relationship is referred to as international comity.  Since states are of equal rank, they do not impose enforced contribution on one another’s properties. 5. TERRITORIAL JURISDICTION  The laws and ordinances are enforceable only within the territorial jurisdiction of the state, except when privity of relationship exists between the taxing state and the object of taxation.  Privity of relationship exists when the State still provides protection to its citizen even outside its territory. For instance, privity of relationship may exist because of citizenship. Accordingly, the government shall continue protection to its overseas  SITUS OF TAXATION Meaning and concepts  Situs (site) or place of taxation refers to the territorial jurisdiction of the State to impose the power of taxation, that is, to charge and collect taxes on persons, properties or transactions. The state taxes the various subjects with its jurisdiction, with the responsibility of extending protection to them.  SITUS OF SUBJECTS OF TAXATION  The taxable situs will depend upon various factors including the nature of the tax and the subject matter thereof, the possible protection and benefit that may accrue both to the government and the taxpayer, the residence or the citizenship of the taxpayer, and the source of income. Application of the Situs of Taxation Subject or object of Taxation Situs of Taxation 1. Person Residence of the Taxpayer 2. Real property Location of the property 3. Personal tangible property Location of the property 4. Personal intangible property Residence of the owner 5. Income Residence of the taxpayer Location where the income is earned Citizenship of the taxpayer 6. Business Location of the business 7. Occupation Location where occupation was conducted Guidelines in the Interpretation of Taxation Laws  1. Taxation laws have prospective application.  2. Taxation laws are resolved in favor of the taxpayer in case of doubt.  3. Taxation laws should clearly indicate tax burden.  4. Provisions on tax exemption should be clear.  DOUBLE TAXATION  Double taxation, in its general sense, means taxing the same subject or object twice during the same taxing period.  In its general sense, it does not violate the constitution. Kinds of Double Taxation  1. Direct duplicate taxation which violates the equal protection clause of the constitution, hence prohibited.  2. Indirect duplicate taxation which is not repugnant to the constitution. Elements of direct duplicate taxation  Taxing the: 1. S a m e o b j e c t o r p r o p e r t y twice 2. By the same taxing authority 3. For the same taxing purpose 4. W i t h i n t h e s a m e t a x i n g period ILLUSTRATION  A municipal ordinance was passed by the Sangguniang Bayan imposing an occupation tax upon owners of fishponds within the municipality. The owners thereof, whose fishponds were already subject to property tax, contested in the court the validity of the ordinance on Is the ground that it constituted double taxation. their theory tenable or not? Explain your answer. Answer:  No. There is no double taxation which could nullify the tax ordinance because taxes covered different subjects and objects, and are for different purposes. The first is property tax while the second is an occupation tax. CLASSIFICATIONS AND DISTINCTIONS OF TAXES  (1) As to subject matter or object: a. Personal, poll or capitation – tax is imposed on individual with regard to his/her residence, fixed in amount, and not dependent on the value of the property or occupation of the taxpayer. Example is the community tax.  B. Property tax – it is imposed on property, either personal or real, based on its value or some other reasonable method of apportionment. Example is the real estate tax.  C. Excise tax – is imposed on the performance of an act or the exercise of a profession. Example are VAT, professional tax, income tax, and estate tax. 2. According to Purpose  A. General or revenue – is imposed to raise revenue to defray the expenses of the government. Examples are income tax and VAT.  B. Special or regulatory – is imposed for special purpose like achieving 3. According to Who Bears the Burden  A. Direct tax – is imposed on persons who are bound by taxation laws to pay. It is non-transferable. Examples are income tax, community tax and estate tax.  B. Indirect tax – is imposed on certain individuals, but was shifted to another person by way of indemnifying himself/herself at the expense of the other. Example is the VAT. 4. According to Determination of Amount  Ad Valorem – refers to the tax with fixed amount in relation to the value of a property as determined by an independent appraiser. Example is the real estate tax.  Specific – is based on certain unit of measurement like head or number, weight, length or volume. Examples a r e t a x o n f e r m e n t e d l i q u o r, distilled spirits and wines. 5. According to Scope or Authority  A. National – is imposed by the national government and being administered by government agencies like the BIR and BOC. Examples are the internal revenue taxes and customs duties.  B. Local or municipal – is imposed by various LGU’s such 6. According to Graduation or Rate  A. Proportional –is imposed based on fixed percentage or rate on property, income or other basis depending on a particular bracket or classification where the subject belongs. Examples are the real property tax, VAT and percentage tax.  TAX distinguish from Toll  Toll has been defined as a sum of money for the use of something, generally applied to the consideration which is paid for the use of road, bridge or the like, of a public nature. 1. A toll is a demand for proprietorship, while a tax is a demand of sovereignty; 2. A toll is paid for the use of another’s property, while tax is paid for the support of the government; 3. The amount of toll depends upon the cost of construction or maintenance of the public improvement used while there is generally no limit on the amount of tax that may be imposed; 4. A toll may be imposed by the government or private individuals or entities, while tax may be imposed only by the government. TAX distinguish from Penalty  Penalty is any sanction imposed as a punishment for violation of law or acts deemed injurious. Thus, the violation of tax laws may give rise to imposition of penalty. 1. A penalty is designed to regulate conduct, while a tax is generally intended to raise revenue; 2. A penalty may be imposed by the government or private individuals or entities, while tax may be imposed only by the government. TAX distinguished from Special Assessment  Special assessment is an enforced proportional contribution from owners of lands especially or peculiarly benefited by public improvements. A tax can be distinguished from a special assessment by considering the characteristics of the latter, namely; 1. A special assessment is levied only on land; 2. It is not a personal liability of the person assessed, his liability is limited only to the land involved; 3. It is based wholly on benefits (not necessary); 4. It is exceptional both as to the time and place. A tax has general application. Tax distinguished from License or Permit fee License or permit fee is a charge imposed under the police power for purposes of regulation. License is rather in the nature of a special privilege, of a permission or authority to do what is within its terms. 1. License fee is the legal compensation or reward of an officer for specific services, while tax is an enforced contribution assessed by sovereign authority to defray public expenses; 2. It is imposed for regulation, while tax is levied for revenue; 3. It involves an exercise of police power, while a tax involves the exercise of the taxing power. 4. The amount should be limited to the necessary expenses of inspection and regulation, while there is generally no limit on the amount of tax that may be imposed; 5. It is imposed on the right to exercise a privilege, while a tax is imposed also on persons and property; 6. Failure to pay license fee makes the act or business illegal, while failure to pay a tax does not necessarily make the act or business illegal. Tax distinguished from Debt A tax is not a debt in the ordinary sense of the word and the two are distinguished as follows: 1. A debt is generally based on contract, express or implied, while a tax is based on law; 2. A debt is assignable, while a tax cannot generally be assigned; 3. A debt may be paid in kind, while tax is generally payable in money; 4. A debt may be subject of set-off or compensation, while a tax is generally not; 5. A person cannot be imprisoned for non- payment of debt, while imprisonment is a sanction for non-payment of tax(except poll tax); Tax distinguished from other terms 1. Subsidy is a pecuniary aid directly granted by the government to an individual or private commercial enterprise deemed beneficial to the public. 2. Revenue refers to all the funds or income derived by the government, whether from tax or from whatever source and whatever manner. 3. Internal revenue refers to taxes imposed by the legislature other than duties on imports and exports. 4. Customs duties are taxes imposed on goods exported from or imported into a country. 5. Tariff ………. a. As a book of rates drawn usually in alphabetical order containing the names of several kinds of merchandise with the corresponding duties to be paid for the same; b. As the duties payable on goods imported or exported. FORMS OF ESCAPE FROM TAXATION 1. Shifting 2. Capitalization 3. Transformation 4. Evasion 5. Avoidance 6. Exemption  What is shifting? Shifting is the transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to another or someone else Meaning of Impact of Taxation Impact of taxation is the point on which tax is originally imposed. In so far as the law is concerned, the taxpayer is the person who must pay the tax to the government. He is also termed as statutory taxpayer-the one on whom the tax is formally assessed. Meaning of incidence of taxation Incidence of taxation is that point on which the tax burden finally rests or settles down. It takes place when shifting has been effected from the statutory taxpayer to another who cannot pass on the burden further. Relations among impact, shifting, and incidence of a tax The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is the result. Hence, the impact of sales t a x ( e. g. VAT ) i s o n t h e seller(manufacturer) who shifts the burden to the customer who finally bears the incidence of the tax.  Kinds of Shifting 1. Forward shifting 2. Backward shifting 3. Onward shifting What is forward shifting? takes place when the burden of the tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer. What is backward shifting? Backward shifting is affected when the burden of the tax is transferred from the consumer or purchaser through the factors of distribution to the factor of production. What is onward shifting? Onward shifting occurs when the tax is shifted two or more times either forward or backward.  Meaning of Capitalization Tax capitalization means the reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay. Meaning of transformation Transformation is the method of escape from taxation whereby the manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units of products at a lower cost. Meaning of tax evasion Tax evasion is the use by the tax payer of illegal or fraudulent means to defeat or lessen the payment of a tax. Meaning of tax avoidance Tax avoidance is the use by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income, in order to avoid or reduce tax liability.  Meaning of exemption from taxation Exemption from taxation is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay.  These are taxes imposed and collected by the national government through the Bureau of Internal Revenue (BIR). The Republic Act No. 8424 otherwise known as the Tax Reform Act of 1997, as amended. It covers the organization and function of the Bureau of Internal Revenue (BIR). It sets out the power and duties of the BIR and the powers and authorities of its commissioner, regional directors, and revenue officers. The largest content of the code pertains to the income tax. This portion of the Act states the definitions, general principles, tax rates, and computations of income tax on individual taxpayers, corporations, estates, and trusts. It also prescribes the accounting periods, methods of accounting, and other income tax requirements that taxpayers should comply. The law governing tariff and customs duties otherwise known as Presidential Decree NO. 1464 which consolidated and codified the tariff and customs laws in the Philippines. The office charged with the administration and enforcement of the law is the Bureau of Customs and Tariff Commission. Restricted agricultural production by paying farmers to reduce crop area. Its purpose was to reduce crop surplus so as to effectively raise the value of crops, thereby giving farmers relative stability again. An act to provide for the registration of, with the collector of internal revenue, and the imposition of fixed and special taxes upon all persons who produce, import, manufacture, compound, deal in, dispense, sell, distribute, or give away opium, marihuana, or any synthetic drugs.  Otherwise known as Republic Act No. 5447, it consists of broad requirements that mandate schools provide financial support appropriate for public education. The Travel Tax is a levy imposed by Philippine government on individuals who are leaving the Philippines, whether Filipino citizens or not, irrespective of the place where the air ticket is issued and form or place of payment, as provided for by Presidential Decree (PD) 1183. The provisions of this Act shall control, as far as they apply, the registration and operation of motor vehicles and the licensing of owners, dealers, conductors, drivers, and similar matters. Otherwise known as the Batas Pambansa Blg. 36, its purpose is to impose an energy tax on electric power consumption and to give businesses and consumers an incentive to use alternative energy sources, such as solar and wind power, and to raise revenue for the government in order to finance public spending. The RA No. 1093 (An Act to Punish Tax Evasion and Willful Refusal to Pay Taxes By Aliens with Deportation), RA No. 1125 (An Act Creating The Court of Tax Appeals) and RA 2211 (An Act Creating A Joint Legislative- Executive Tax Commission, Defining Its Objectives, Powers And Functions, And For Other Purposes), are laws imposed by the government which concerns about the tax laws in the Philippines. A presidential decree providing for the increase in capitalization of rural banks.  These are the taxes imposed by the local government. Usually collected in the form of property taxes, and is used to fund a wide range of civic services from garbage collection to sewer maintenance. The amount of Otherwise known as Republic Act No. 7160 or the Local Government Code of 1991, as amended. These taxes, fees or charges are imposed by the local government units, such as provinces, cities, municipalities, and barangays, who have been given the power to levy such taxes by the code. All real property in the province is assessed annually for taxation purposes on the basis of its real and true value. These are taxes imposed by the barangay or the municipality or province, in which each of it varies from place to place given certain conditions. These taxes or laws needs to be approved by the government before they get imposed to their respective divisions.  INCOME TAX meaning and concept INCOME (for tax purposes) means all wealth which flows into the taxpayer other than as a mere return on capital. So, not all receipts of a person are income. Definition of Income Tax Income tax is a tax on a person’s income, profits and the like, realized in one taxable year. Nature and purpose of income tax It is generally regarded as a privilege tax and not a tax on property. It is a tax on the privilege to earn an income. Its purpose is to raise revenue.  SOURCES OF INCOME SOURCE is ascribed to the place wherein the income is earned. It is governed by the situs of taxation. This classification of income is necessary to determine whether such income is subject to tax or not.  INCOME may be earned from: 1. Within the Philippines; 2. Without the Philippines; or 3. Partly within and partly without the Philippines. Income within………… Income Within comprises earnings from within the Philippine territory. Examples of Income Within 1. C ompensation for la b o r o r service derived within the Philippines; 2. Interest on bonds, notes deposits and the like earned in the Philippines; 3. Dividends declared by the domestic corporations; 4. Rentals and royalties from property located within the Philippines; 5. Gains, profits and income from sale of real property or personal property in the Philippines. Income Without………. Income Without refers to earnings coming from outside the Philippines or income derived from foreign countries. EXAMPLES………. 1. Compensation for labor or service rendered by overseas contract workers; 2. Interest on bonds, notes, deposits and the like earned abroad; 3. Dividends declared by nonresident foreign corporation; 4. Rentals and royalties from property located outside the Philippines; 5. Gains, profits and income from sale of real property as well as from personal property located outside the Philippines.  Income Partly Within and Partly Without Income from sources partly within and partly without the Philippines includes gains, profits and income from: 1. Transportation or other services rendered partly within and partly outside; 2. The sale of personal property produced within and sold outside, or vice versa. Rules to remember……… 1. Incomes earned within the Philippines are taxable. 2. Income earned outside the Philippines is taxable only when the taxpayer is a resident Filipino citizen or a domestic corporation. 3. Income earned outside the Philippines by a nonresident Filipino Citizen and Foreign Corporations is not subject to tax in the Philippines. 4. When an income is earned partly within and partly without, only income within is taxable in the Philippines, except if the taxpayer is a resident citizen or a domestic corporation.  INDIVIDUAL TAXPAYERS Individual taxpayers are natural persons with income derived within the territorial jurisdiction of taxing authority. These individual taxpayers are classified into two major general classifications- citizens and aliens. CLASSIFICATIONS OF CITIZENS 1. Resident Citizen is a Filipino citizen who stayed permanently in the Philippines or stayed outside the Philippines for less than 183 days during the taxable year. 2. Nonresident Citizen is a Filipino citizen who stayed outside the Philippines for 183 days or more during the taxable year and has established proof to the Commissioner of Internal Revenue of his definite intention to reside outside the Philippines on a permanent basis as a immigrant or employee. CLASSIFICATIONS OF ALIENS 1. Resident Aliens are persons who are not citizens of the Philippines but are residing within the Philippines. 2. Nonresident Aliens are foreign individuals whose residences are not within the Philippines.  INCOME Nature and Concept  Gross income means all income derived from whatever source, including the following: 1. Compensation income 2. Income from profession 3. Income from business 4. Capital gains 5. Passive income 6. Prizes and winnings General Classification of Income  For tax purposes, the income of a taxpayer may be broadly classified as taxable income and non-taxable income.  Taxable income refers to the earnings of a taxpayer subject to the basic or normal tax, which rates ranging from 5% to 32%, or to final tax.  Non-taxable income refers to earnings of the taxpayer that are excluded from gross income as provided in the NIRC, as amended, and other tax laws.  INCOME TAXABLE NON-TAXABLE  Life insurance proceeds  Compensation  Return of premium  Business income  Gifts, bequests, devices  Gains from property  Compensation for injuries  Passive income  Retirement benefits  Other taxable income Requisites for income to be taxable 1. There must be profit or gain. The taxpayer must be benefited from the inflow of earnings either in the form of cash or its equivalent. 2. The profit or gain must be realized. There should be realization of benefits b y t h e t a x p a y e r, e i t h e r a c t u a l o r constructive. Realization implies receipt of benefits. 3. The gain or profit must not be  COMPENSATION INCOME  Compensation income means all remuneration for services performed by an employee for his/her employer under the employee-employer relationship, unless expressly excluded by the tax code.  Composition of Gross 1. Compensation Salary, wage or fee Income 2. Commission 7. Separation pay 3. Honoraria 8. Retirement pay 4. Allowances 9. Sick leave pay/vacation 5. 13thmonth pay and other leave pay benefits 10. Fringe benefits 6. Holiday pay, overtime pay, night shift differential, & hazard pay  CATEGORIES OF INDIVIDUAL TAXPAYER’S INCOME 1. Compensation income 2. Income from profession 3. Income from business 4. Capital gains 5. Passive income  PERSONAL EXEMPTIONS Personal exemptions are the arbitrary amounts allowed by the law as a deduction from the gross compensation income and/or net business income and/or professional income as the case may be, for personal, living, or family expenses.  TAXPAYERS ALLOWED FOR PERSONAL EXEMPTIONS 1. Citizens of the Philippines, whether resident or non resident 2. Resident aliens 3. Estates and trusts 4. Nonresident alien REQUISITES for Nonresident Alien for Personal Exemptions 1. The country of which the nonresident alien is a subject or a citizen has an income tax law; 2. Such income tax law of the foreign country allows personal exemptions to a Filipino citizen deriving income there from but not residing therein; 3. The nonresident alien files an income tax return in the Philippines in due time; 4. Such return is true and accurate, covering all income received form sources within the Philippines. LIMITATIONS ON THE PRINCIPLE OF RECIPROCITY  The personal exemptions does not include additional exemption;  The amount of exemption shall in no case exceed the personal exemption granted by our law to citizens or residents of the Philippines. Taxpayers Not Allowed for Personal Exemptions  Nonresident aliens engaged in trade or business in the Philippines not subject to reciprocity;  Nonresident aliens not engaged in trade or business in the Philippines  Corporations  Partnerships Kinds of Personal Exemptions  Basic personal exemption  Additional exemption What is basic personal exemption?  It is a deductible allowance whose amount allowed by the law shall depend upon the status of the individual taxpayer himself (sec. 35(a), NIRC)  Taxpayers entitled to Additional exemptions  Resident or nonresident citizens;  Resident aliens, provided that the qualified dependent children are living with him in the Philippines.  QUALIFICATIONS OF DEPENDENTS 1. Parent and Senior Citizen a. living with the taxpayer b. chiefly dependent upon the taxpayer for support c. not gainfully employed 2. Brothers or Sisters  A. living with the taxpayer  B. dependent upon the taxpayer for support  C. not gainfully employed  D. not married  E. not more than 21 years old, or if mentally or physically incapacitated, even older 3. Child  A. Legitimate, illegitimate or legally adopted  B. Living with the taxpayer  C. Chiefly dependent upon the taxpayer for support  D. Not gainfully employed  E. Not married  F. Not more 21 years of age  G. Regardless of age if incapable of self- SPECIAL DEDUCTIONS  These are neither personal nor itemized deductions but are specifically permitted by the law to reduce the taxable income of an individual taxpayer.  EXAMPLES OF SPECIAL DEDUCTIONS Premium payments for health Premium payments for hospitalization insurance Note: allowed deduction at an amount not exceeding P2,400 per family provided that the said family has a gross income of not more than P250,000(per annum)  Rates of taxable income of individuals Not over P10,000 5% Over P10,000 but not over P30,000 500 + 10% of the excess of P10,000 Over 30,000 but not over 70,000 2,500 + 15% of the excess of 30,000 Over 70,000 but not over 140,000 8,500 + 20% of the excess of 70,000 Over 140,000 but not over 250,000 22,500 + 25% of the excess of 140,000 Over 250,000 but not over 500,000 50,000 + 30% of the excess of 250,000 Over 500,000 125,000 + 32% of the excess of 500,000 Formula in Computing Income Tax  Gross income  less personal exemption  =Net taxable income x tax rate  = Tax due  TRANSFER TAXES Meaning and Concept Transfer taxes are those imposed upon the gratuitous disposition of private property. Under our law, they are taxes levied on the transmission of property from decedent to his heirs or from a donor to a donee. The first are referred to as “death taxes.”  KINDS OF DEATH TAXES 1. Estate tax is a tax on the right of the deceased person to transmit his estate to his lawful heirs or beneficiaries. It is levied upon the total net value of the property of a deceased person. 2. Inheritance tax is a tax on the right of the heirs or beneficiaries to receive the estate of the deceased person. It is levied upon the part of an estate which each heir receives.  NATURE OF ESTATE TAX It is not a direct tax on property, nor is it a capitation tax, that is, the tax is laid neither on the property, nor on the transferor or the transferee, but on the right of the decedent to transmit his estate.  PURPOSE OF THE TAX 1. They are imposed at high rates to help reduce undue concentration of wealth in society to which the receipt of inheritance is a contributing factor. 2. Their imposition is also justified on the ground that it clearly conforms to the widely accepted principle of ability to pay since the beneficiaries receive assets which are in the nature of unearned wealth or windfall, thereby creating an ability to pay the tax.  Governing Law  Transfer taxes are governed by the laws existing at the time the transfer takes place.  Donations inter vivos are governed by the law existing at the time of the effectivity of the donation since the transfer of properties takes place at that time.  Donation mortis causa are governed by the law at the time of death because it is at that time that the property is transferred. Situs of Transfer Taxes  The situs of transfer taxes (estate and donor’s taxes) is considered as governed by a combination of three (3) doctrines, the nationality doctrine, the domiciliary doctrine and the location doctrine. These doctrines are likewise embraced by the symbiotic relationship or the protection and support doctrine in taxation. Steps in the determination of the estate tax  Determine the nationality and residence of the decedent.  Determine the nature and location of the properties of the decedent.  Determine the composition and value of the gross estate  Determine the nature and value of the allowable deductions and subtract from the gross estate in order to arrive at the net estate.  Apply t h e ra t e s o f t h e estate tax that are applicable to the net estate.  Determine the applicable penalties and surcharges, if any. SITUS OF ESTATE TAXATION  1. Situs of real property for estate taxation – the place where the real property is located.  2. Situs of tangible personal property – the rule to follow is the mobilia sequuntur personam (movables follow the person). Thus the situs of taxation is the place where the owner is found not in the place where the tangible personal property is physically located.  3. Situs of intangible personal property – where the intangible personal property has obtained a business situs is the taxing authority.  4. The situs of estate taxation may also be determined by the domiciled or the citizenship of the decedent. Real Property for Estate Tax Purposes  Article415 Civil Code of the Philippines  RATES OF ESTATE TAX OVER BUT NOT TAX PLUS OF OVER EXCESS OVER 200,000 EXEMPT 200,000 500,000 0% 5% 200,000 500,000 2,000,000 15,000 8% 500,000 2,000,000 5,000,000 135,000 11% 2,000,000 5,000,000 10,000,00 465,000 15% 5,000,000 0 10,000,00 AND OVER 1,215,000 20% 10,000,00 0 0  FORMULA FOR COMPUTING NET ESTATE GROSS ESTATE Less allowable deductions = Estate after deductions less ½ net share of surviving spouse in conjugal (or community) = Net estate of decedent less 200,000 exemption = Taxable net estate  Meaning of Gross Estate Gross estate is the total value of all the property, whether real or personal, tangible or intangible belonging to the decedent at the time of his death, situated within or outside the Philippines, where such decedent was a resident or citizen of the Philippines. Gross Estate  Consists of all property owned by a decedent at the time of his death excluding the exclusive properties of the surviving spouse  Components of Gross Estate Real Properties  Immovable properties such as land, building, resort, etc. Personal Properties  Franchises,shares, obligations or bonds issued by foreign corporation provided that…  85% is in the Philippines  It acquired business situs in the Philippines  It is established in the Philippines  Summary Components of Gross Estate Resident/ Non-resident Non-resident Citizen (no reciprocity) (with reciprocity) Real Properties Within    Without    Personal Properties Tangible- within    Tangible-without    Intangible- within    Intangible- without    Property included in Gross Estate The general rule is that all property owned by the decedent has to be included in the gross estate, to the extent of the value of his interest in such property at the time of his death.  Meaning of Net Estate Net estate means gross estate less allowable deductions and specific exemptions. Determination of value of estate 1. Usufruct – to determine the value of the right of usufruct, use or habitation, as well as of annuity, there shall be taken into account the probable life of the beneficiary. 2. Properties – it shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be, whichever is the higher of: a. The fair market value as determined by the commissioner; or b. The fair market value as shown in the schedule of values fixed by the Provincial or City assessors. Deductions o Are items allowed by law to be deducted to the gross estate in order to arrive at the net taxable estate. o Only those allowed by law shall be claimed as deduction. o These items must be able to justify and should be proved that the expenses really exist.  Funeral Expense Judicial sLosses Claims against the estate Indebtedness Claims against insolvent person Taxes ORDINARY Transfer for public use Amount received by heir under RA 4917 Vanishing deductions Share of surviving spouse Family home SPECIAL Medical Expenses Standard deduction  Deductions from Gross Estate 1. Funeral 2. Judicial 3. Medical expenses 4. Losses 5. Indebtedness 6. Taxes 7. ½ net share of the surviving spouse 8. 200,000 specific exemptions 9. Family Home 10. Standard Deduction  Funeral Expenses o Actual funeral expenses means cost incurred in connection with the internment or burial of the deceased with official receipts o The amount allowed as deductions shall equal to the ACTUAL EXPENSES incurred OR the 5% of the GROSS ESTATE whichever is LOWER but in NO CASE shall exceed P200,000.  Funeral Expenses Example. Compute the amount deductible funeral expenses in each of the following cases: Case Gross estate Actual Funeral Expenses 1 P500,000 P70,000 2 2,000,000 90,000 3 4,500,000 185,000 4 5,000,000 220,000  Funeral Expenses Answers: Case 5% of Gross Actual Deductible Estate 1 P25,000 70,000 P25,000 2 100,000 90,000 90,000 3 225,000 185,000 185,000 4 250,000 220,000 200,000  Funeral Expenses o Funeral expenses shall consist of the following o Internment and/or cremation fees o Mourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the occasion of the burial o Expenses for the decedent’s wake, including food and drinks before the burial o Fees and charges for the rites and ceremonies incident to the burial o Expenses for the death notices published, telegrams and cable grams sent to the relatives of the deceased; and o Cost of the burial lot, tombstone or monument but not their upkeep. In case it is a family lot, the lot of the deceased shall only be deductible. Funeral Expenses Example. Chit Sharon’s gross estate is P3,000,000. Her executor is claiming the following as funeral expenses related to the death of Chit: Hospitalization incurred during the last 3 months prior to Chit’s death P50,000 Burial lot, 20% are paid from friends contribution 50,000 Expenses for wake before burial 20,000 Thank you cards to the sympathizers 2,000 Telegrams and cables sent to the relatives 1,000 Mourning apparel of the surviving spouse and children 3,000 Mourning apparel of the relatives 1,000 Entertainment expenses during the rites and ceremonies during burial 2,500 How much is the allowable funeral expense?  Funeral Expenses Answer: Burial lot (P50,000 x 80%) P40,000 Expenses for wake before burial 20,000 Telegrams and cable to relatives 1,000 Mourning apparel of the surviving spouse and 3,000 children Entertainment expenses during the rites and 2,500 burial ceremonies Allowable funeral expenses P66,500 Judicial expenses o Are allowed deductions incurred for the administration, inventory taking of assets, and settlement of the estate. o To be deductible, judicial expenses should be incurred during the settlement of estate but not beyond the last day prescribed by law, or the extension thereof, for the filing of the estate tax return. Judicial expenses  include  Fees of executor or administrator  Attorneys fee  Court fees  Accountant fees  Appraisers fees  Clerk hire  Costs of preserving and distributing the estate  Costs of storing or maintaining property of the estate and  Brokerage fees for selling property of the estate. Judicial expenses o Expenses not essential to the proper settlement of the estate but incurred for the individual benefit of the heirs, legatees, or devisees are not allowed as deductions. Thus, the following are not allowed as deductions: o Attorney’s fees incident to litigation incurred by the heirs in asserting their respective rights or claims as to who are entitled to the estate left by the deceased; o Premiums paid by a judicial administrator on his bond are not deductible because the ability of the appointee to give bond in in the nature of a qualification o Compensation of trustees such expenses being for the account and benefit not of the estate but of the beneficiaries. Judicial expenses Example. Malakas and Maganda had a disagreement in the sharing of inheritance of the estate of their parents. The disagreement prompted both parties to bring the matter to the court. Both of them incurred and paid attorney’s fees incident to litigation. a. Are the expenses borne by the opposing parties deductible from gross estate under judicial expenses? Answer: No Casualty losses o All losses incurred during the settlement of the estate arising from theft, robbery embezzlement, fire, shipwrecks, storms and other calamities. o Casualty losses can be claimed as long as: the amount of loss is not compensated for by any insurance or extra judicial settlement; and o They have not been claimed as deduction from gross income for purposes of income tax computation. Claims against the estate o Pertains to debts which are properly chargeable and enforceable against the estate. o To be deductible, the following requisites must be complied o The liability represents a personal obligation of the deceased existing at the time of his death except unpaid obligations incurred incident to his death such as unpaid funeral expenses and unpaid medical expenses. o That the liability was contracted in good faith and for an adequate and full consideration in money or money’s worth o The claim must be a debt or claim which is valid in law and enforceable in court o The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have prescribed.  Claims against the estate Example. Doris borrowed P50,000 from her friend, Sabel. Before indebtedness was paid, Doris died. a. Is the unpaid obligation deductible from the gross estate of Doris? b. How about if its deductibility would leave nothing to be distributed among the heirs? c. How about if Sabel decides to condone the debt? ANSWERS: YES; YES; NO  Claims against Insolvent Person ▪ A requisite for its deductibility is that the value of the decedent’s interest therein is included in the value of the gross estate and that the debtors are incapable of paying their indebtedness.  Claims against Insolvent Person Example. Bolalin borrowed P150,000 from Arturo. After a month, the debtor paid P50,000. before the remaining balance of P100,000 was paid, Arturo died. Prior to his death, the court declared Bolalin insolvent. The total assets and total liabilities of the debtor amount to P200,000 and P500,000, respectively. How much bad debt is deductible from the estate of Arturo? Remaining debt of Bolalin P100,000 Less: Recoverable amount (2/5 x P100k) 40,000 Amount deductible P 60,000 Unpaid Mortgages o These are unpaid indebtedness or loans secured by debtor’s property, contracted in good faith and for an adequate and full consideration in money or money’s worth. o To b e d e d u c t i b l e , t h e p r o p e r t y mortgaged must be part of the gross estate. Unpaid taxes  Refer to taxes incurred prior to the date of the decedent’s death and remained unpaid as of the date of death. DEATH Before After Deductible Non-deductible Transfer for Public Use o All bequests, legacies, devises or transfers to or for the use of the Philippine Government o Other than the Philippine Government, NOT allowed as deduction o Must be through TESTAMENTARY succession o Deductible from exclusive portion of the estate; otherwise it is conjugal (must have written consent of the other spouse) o Deemed to have been done by the husband alone; otherwise there should be express stipulation that the wife joins the donation o If silent, it should be taken as an exclusive property  Vanishing Deduction o To lessen the burden of paying tax due to the short period of property transfers by reason of early deaths o Same Property must be included in the gross estate o To be deductible: o Present decedent died within 5 years from the receipt of property through gratuitous transfer o The property involve is within the Philippines o Tax must have been actually been paid for such property o It must came from a prior decedent o No similar deduction must have been allowed to prior decedent Vanishing Deduction o Rate of Vanishing Deduction 100% - if within 1 year 80% - if > 1 year to 2 years 60% - if > 2 years to 3 years 40% - if > 3 years to 4 years 20% - if > 4 years to 5 years Vanishing Deduction o Computation of Vanishing Deduction 1. Value to be taken- previous transfer vs present (Lower) 2. Initial Basis- Value taken less mortgage paid 3. Proportionate Deduction from Initial Basis = ELIT + TPU x (Initial Basis / Gross Estate) 4. Basis of Vanishing Deduction Initial Basis less: Proportionate Deduction 5. Percentage of Deduction Level  Vanishing Deduction Illustration: Gina Dan, died on Oct 21, 2013 leaving a parcel of land which she inherited from her mother, Pina G.A Dan who died May 20, 2010. The value of the property at the time of death of her mother was 350,000 but it appreciated to 475,000 in 2013. The gross estate, deductions and other data consisted of the following:  Vanishing Deduction Illustration: Community Property 950,000 Exclusive Properties 650,000 Funeral Expenses 40,000 Judicial Expenses 25,000 Medical Expenses 15,000 Bequests to Phil Govt 10,000 Claims against the Estate 15,000 At the time of death of Pina, the parcel of land had an unpaid mortgage of 50,000 of which 20,000 was paid by Gina.  Vanishing Deduction Illustration: Solution: Value in estate of prior decedent 350,000 Value in estate of present decedent 475,000 1. Lower Value 350,000 Less: Mortgage 20,000 2.Initial Basis 330,000 Less: Deductions (Pro-rated) Funeral Exp 40,000 Judicial Exp 25,000 Transfer for Pub Use 10,000 Claims against Estate 15,000 Unpaid Mortgage 30,000 Total 120,000 3. Deductible (330,000/1,600,000 x 120,000) 24,750 4. Base 305,250 5. Rate (More than 3 years to 4 years) 40 % o VANISHING DEDUCTION 122,100 Amount Received Under RA 4917 o Refers to the amount received by heirs as a retirement benefit of the decedent o To be Deductible: o Has been in the service for the same employer for at least 10 years o Not less than 50 years of age o Availed only once Share of the Surviving Spouse (Communal or Conjugal Properties Net Estate) x 50% Special Deductions 1. Family Home o The dwelling house including the land to where it is located o FMV of the Family Home (Gross Estate) o FMV of the Family Home vs 1,000,000 (Deductions) o Excess subject to Estate Tax o Exclusive Property taken up at 100% o Conjugal Property taken up at 50%  Special Deductions 1. Family Home Illustration: Residential Lot (Conjugal) 2,300,000 Residential House (Exclusive) 800,000 How much is deductible? Residential Lot 1,150,000 Residential House 800,000 Family Home 1,950,000 Deductible 1,000,000  Special Deductions 2. Medical Expense o Not exceeding 500,000 can be claimed o In excess of 500,000 can no longer be deducted o The expenses must have been incurred within one year prior to death  Special Deductions 3. Standard Deduction o Amounts to 1,000,000 o No need of substantiation o Any Citizen and Resident  Allocations of Deductions o If the total amount exceeds the statutory limit, the basis is TOTAL AMOUNT. o If no means to trace the deduction, the basis will be the total gross estate.  Non Resident Alien Decedent o Allowed Deductions o ELIT o Allowable Deduction= World ELIT x (PGE/TGE) o Transfer for Public Use o Vanishing Deductions  DONOR’S TAX DONATION is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it. (Art. 725, Civil Code) Donation o An act of gratuitously transferring property or rights motivated by the liberality of the giver in favor of the receiver o The transfer includes not only the transfer of ownership but also the passage of control over the economic benefits of the property  Donation Kinds of Donation Mortis Causa Inter Vivos 1. Subject to Estate Tax 1. Subject to Donor’s 2. Donor retains ownership Tax before his death 3. The transfer is revocable 2. Takes effect during by the donor at will the lifetime of the 4. The transfer is void if donor. the donee dies ahead before the donor  KINDS OF DONATION 1. Inter vivos – if made between living persons to t ak e e ff e c t d u r in g t h e lifetime of the donor. 2. Mortis causa – if made in the nature of a testamentary disposition, that is, it shall take effect upon the death of the donor.  Donations not subject to donor’s tax Only donations inter vivos are subject to donor’s tax. 1. Donations mortis causa are subject to estate tax. They are governed by the laws on succession. 2. Donations inter vivos of the amount of P50,000 or less and those declared exempt by the tax code, and special laws are also not subject to donor’s tax.  Essentials of Donation 1. Capacity of the Donor o Refers to the condition and legal competence of the donor to enter into a valid contract o The donor must be capacitated (not necessary for donee) 2. Donative Intent o The declaration of the transfer of ownership by the owner without consideration a) Oral Donation- any personal property with value less than 5,000, with simultaneous delivery of the thing b) In Writing- the value of personal property exceeds 5,000 whose donation and acceptance must be in writing, otherwise it is void. c) Public Instrument- any donation which involves real property  Essentials of Donation 3. Delivery of the Gift o The delivery may be Actual or Constructive o Completion of the gift requires physical delivery or delivery of the instrument o Donor’ tax does not apply until there is a completed gift (no reservation over the gift) 4. Acceptance of the Gift o Acknowledgement of the thing donated o It is perfected from the moment the donor has known the acceptance by the donee and completed by the delivery  Gross Gift  The value of the property or right donated s u b j e c t t o d o n o r ’s t a x b e f o r e a n y deduction Classifications of Donor 1. Citizen or Resident Alien- taxable for donations within and outside Philippines 2. Nonresident Alien- taxable only for the donations within the Philippines Gross Gift Illustration: TiaKemi donated all his properties to his relatives in the Philippines. Property A in Baguio to Mr. Angkin 1,500,000 Property B in Canada to Mr. Amin 2,500,000 Total 4,000,000 1. If TiaKemi is a resident, how much is the Gross Taxable Donation? 2. If TiaKemi is a nonresident, how much is the Gross Taxable Donation? 1. Answer: 4,000,000 2. Answer: 1,500,000  Gross Gift Summary Application GROUP OF DONORS AND TAXABLE DONATIONS Gross Gift’s Location DONOR Within Outside Philippines Philippines A. Citizen or Resident Real Property Taxable Taxable Tangible Personal Property Taxable Taxable Intangible Personal Property Taxable Taxable B. Nonresident Alien Real property Taxable None Tangible Personal Property Taxable None Intangible Personal Property Taxable* None  Conjugal Donation o Husband and Wife cannot transfer by virtue of sale or donation any conjugal or communal property WITHOUT CONSENT from the other, unless it is a moderate donations for charity or on occasion of family rejoicing o Spouses are considered as SEPARATE DONOR of the conjugal property o Unless, the wife expressly joins in making the donation, it is presumed to have been done by the husband o Donations made between husband and wife during marriage are void, except as cited in item 1. o Donation Mortis Causa is valid subject to Estate Tax. Conjugal Donation Illustration: Mr and Mrs Galante, spouses and citizens of the Philippines, donated to their legitimate daughter the following properties: Vacation House (conjugal property- Hong Kong 1,500,000 Car (conjugal property)- Phil 750,000 Jewelry (exclusive property of Mrs.Galante) 475,000 Total 2,725,000 The Gross Gift of the Spouses are computed as: Mr. Galante Mrs.Galante Vacation House (1,500,000/2) 750,000 750,000 Car (750,000/2) 375,000 375,000 Jewelry 475,000 Gross Gift per Spouse 1,125,000 1,600,00  Valuation of Donation General Valuation: The Value existing at the TIME THE GIFT IS MADE. o Cash Gifts- at Face Amount o Personal Property- the Fair Market Value o Real Property- FMV by the City Assessor or by the BIR, higher o Transfer for Inadequate Consideration- the excess of the fair market value (personal property), however if it is a real property, it is not subject to donor’s tax but subject to final tax. o Net Gift- the amount of mortgage assumed is deducted from the fair market value of the property  Deductions from Gross Gifts Classifications of Donors Citizen or Resident Nonresident Alien Deductible Items 1. Dowries Yes No 2. Encumbrances Yes Yes 3. Diminution Yes Yes 4. To Government Yes Yes 5. To NGO Yes Yes  Deductions from Gross Gifts 1. Dowries- gift given by natural or adopting parents on account of marriage o A deduction of 10,000 is allowed provided that the gift is given before the wedding or within one year after the celebration.  Deductions from Gross Gifts Illustration: On January 1, 2016, Mr and Mrs Mayaman donated a house and lot, a conjugal property, at fair market value of 620,000 to their legitimate son on account of his marriage on January 15, 2016. The net gift of each spouse is: Mr. Mayaman Mrs.Mayaman Gross Gift (620,000/2) 310,000 310,000 Less: Deductions 10,000 10,000 Net Gift of each Spouse 300,000 300,000 Deductions from Gross Gifts 2. Encumbrance Assumed by the Donee- a claim or liability attached to a property such as mortgage, security interests, cost of rights and unpaid taxes Allowed as a deduction once assumed by the donee. Deductions from Gross Gifts Illustration: Miss Tapia donated to Mr Gomez, her boyfriend, a car amounting to 400,000. The car has an unpaid mortgage of 180,000. Mr Gomez agreed to assume payment for the mortgage. The Net Gift of Miss Tapia would be: Gross Gift-Car 400,000 Less: Deduction (Mortgage assumed) 180,000 Net Gift 220,000  Deductions from Gross Gifts 3. Diminution of Gift Provided by the Donor – refers to the decrease in the value of the property donated as a result of a condition made by the donor to the done.  Deductions from Gross Gifts Illustration: Rista donated 300,000 to Huthut on condition that the latter will give 60,000 of the total gift to the charity. The net gift of Rista would be: Gross Gift 300,000 Less: Deduction- diminution to charity 60,000 Net Gift 240,000  Deductions from Gross Gifts 4. Donations to the National Government- gifts made for the use of the National Government, or any entity created by any of its agencies not constructed for profit  Deductible at 100% of the gift (Donation during Election must be reported to COMELEC).  Deductions from Gross Gifts Illustration: Don Pepot donated his 100 hectares land valued at the date of donation at 1,000,000 as follows: National Government 500,000 Solano Local Government 300,000 DIGONG, friend 200,000 The Net Gift of Don Pepot would be: Gross Gift 1,000,000 Less: Deductions(500,000+300,000) 800,000 Net Gift 200,000  Deductions from Gross Gifts 5. Donation to Non Profit Organizations- donations to educational, charitable, religious, cultural, social welfare, accredited NGOs and other related agencies are allowed as exemption as long as that not more than 30% of the donation shall be used for administrative purposes. Deductions from Gross Gifts Illustration: Mr. Eloh Canoe, a nonresident alien, donated 1,000,000 to an accredited NGO. Compute for the Net Gift. a. If not more than 30% Gross Gift 1,000,000 Less: Deduction 1,000,000 Net Gift -0 b. If more than 30% Gross Gift 1,000,000 Less: Deduction - Net Gift 1,000,000  Tax Exempt Donations 1. The first 100,000 of the net gift to relatives every year. 2. Donations given to the following: a) Ramon Magsaysay Award Foundation b) Philippine Inventor’s Commission c) Philippine-American Cultural Foundation d) International Rice Research Institute e) Integrated Bar of the Philippines f) Development Academy of the Philippines g) National Museum, National Library, and the archives of the National Historical Institute h) National Social Action Council i) Southern Philippines Development Administration j) Task Force on Human Settlement k) Intramuros Administration l) Irrevocable donations of American-owned private lands m) Aqua-culture Development of the Southeast Asian Fisheries Development Center of the Philippines n) Museum of Philippine Costumes o) Donations of Foreign Origin p) Gratuitous transfer by a religious corporation  Donor’s Tax  Imposed on the transfer of property by way of gift intervivos  The tax shall not apply until there is completed gift  Computation is on a cumulative basis over one calendar year Formula: 1. On the first donation Gross gifts xxx Less: Exemptions (deducitons) if applicable xxx Net taxable Gifts xxx Multipy by applicable tax rates xxx Donor’s Tax Due xxx 2. On Subsequent donations within same calendar year Gross gifts xxx Less: Exemptions (deducitons) if applicable xxx Net taxable Gifts xxx Add: All previous Net gifts during the year xxx Aggregate Net Gifts xxx Donor’s Tax on the Aggregate Net Gift xxx Less: Donor’s Tax on Previous Net Gifts xxx Donor’s Tax Due, Current xxx  Rates of Donor’s Tax 1. Gifts to Relatives- in general, the donor’s tax for each year shall be computed on the basis of the total net gifts made during the calendar year Net Gift Tax Plus Of the Excess Over Not Over Shall Be % Over - 100,000 exempt - - 100,000 200,000 - 2% 100,000 200,000 500,000 2,000 4% 200,000 500,000 1,000,000 14,000 6% 500,000 1,000,000 3,000,000 44,000 8% 1,000,000 3,000,000 5,000,000 204,00010% 3,000,000 5,000,000 10,000,000 404,00012% 5,000,000 10,000,000 & above 1,004,000 15% 10,000,000 Rates of Donor’s Tax 2. Gift to Stranger- the tax payable by the donor shall be 30% of the net gift. For purposes of Taxation, a stranger is a person who is NOT a: 1. Brother, sister, (whether by whole or half blood). Spouse, ancestor and lineal descendant; or 2. Relative by consanguinity in the collateral line within the fourth degree relationship  For Donor’s tax purposes, the children of the first cousin of the donor are considered strangers. Rates of Donor’s Tax May 10 Gross Gift (Antique) Illustration: 100,000 Mr Santiago Baldado donated the following during 2013: Less: Deduction - Apr 30 Net Taxable Gift 100,000 Jan 5 Gross HouseGift: (Cash) and lot to Francis, his 50,000 legitimate son, Add:Deduction- less: All previous net gifts Diminution 1,290,000 10,000 1,000,000 A gGift Net gregate Net Gifts 40,000 on account of marriage 1,390,000 M a r51 5 Multiply Jan Gross C by Donor’s Tax Rate (Stranger) a Giftr t o (HouseM Donor’s Tax on the Gift a r andi a , h Lot) i s l e g i t i m a t e d a 30% u g h t12,000 1,000,000 er on 300,000 Less: Deduction- Dowry 10,000 Donor’s Tax on 1,000,000 44,000 account Net Mar 15 Gross Taxableof her Gift birthday 990,000 Ta x Gift o n (Car) e x c e s s ( 2 9 0 , 0 0 0 x 8 % ) 300,000 Apr 30 Less:Cash to Susan, his secretary, on account50,000 Deduction - 31,200 of Nether Donor’s birthday. TaxGift Taxable On condition that 10,00014,000 on 500,000 300,000 D o n o r ’s Ta x o n t h e a g g r e g a t e n e t g i f t s shall T be a x All Add: ngiven E x c to o previous e s charity. net sgifts (490,000x6%) 990,000 75,200 May 10 Antique Aggregateitems Net Gifts 29,400 to Tokmo, his uncle, on 1,290,000 100,000 l e s s : D o n o r ’s t a x , p r e v i o u s account Donor’s Tax, of gratitude Current 43,400 67,200 Donor’s Tax on 1,000,000 44,000 D oon Tax n excess o r ’ s (290,000 t a x , xc8%) urrent 23,200 The Donor’s Tax Donor’s of Mr Baldado would be: 8,000 Tax on the aggregate net gifts 67,200 less: Donor’s tax , previous 43,400 Donor’s tax, cu rre n t 23,800  Tax Credits 1. Only ONE Foreign country is involved Tax Credit= Net Donations in Foreign Country x Donor’s Tax World Net Donations OR Donor’s Tax = Actual Donor’s tax paid to foreign country whichever is LOWER 2. TWO or MORE Foreign Countries Limit A: Per Foreign Country Net Donations per Foreign Country x Donor’s Tax Entire Net Donations OR Donor’s Tax = Actual Donor’s tax paid to foreign country whichever is LOWER Limit B: By Total Net Donations ALL Foreign Country x Donor’s Tax Entire Net Donations OR The Actual Donor’s Tax paid to Foreign Country, LOWER Value  Tax Credits Illustration: The following were donations made by Mr Galante, a Filipino, to his relative for the taxable year 2014: Donation of Property which are located in: Foreign Country A 300,000 Foreign Country B 200,000 Philippines 500,000 Total Donations 1,000,000 Foreign Donor’s Tax Foreign Country A 10,600 Foreign Country B 10,000 How much is the Tax Credit and the Donor’s Tax Due?  Tax Credits Illustration: Donation of Property which are located in: Foreign Country A 300,000 Foreign Country B 200,000 Philippines 500,000 Total Donations 1,000,000 Foreign Donor’s Tax Foreign Country A 10,600 Foreign Country B 10,000 Limit A: Country A= 300,000 x 44,000 = 13,200 1,000,000 vs = 10,600 10,600 Country B=200,000 x 44,000= 8,800 1,000,000 vs = 10,000 8,800 Total 19,400 Limit B: vs Total Foreign: 500,000 x 44,000 = 22,000 19,400 1,000,000  Tax Credits Illustration: Donation of Property which are located in: Foreign Country A 300,000 Foreign Country B 200,000 Philippines 500,000 Total Donations 1,000,000 Limit A: Country A= 300,000 x 44,000 = 13,200 1,000,000 vs = 10,600 10,600 Country B=200,000 x 44,000= 8,800 1,000,000 vs = 10,000 8,800 Total 19,400 Limit B: vs Total Foreign: 500,000 x 44,000 = 22,000 19,400 1,000,000 Tax on 1,000,000 44,000 Less: Tax Credit 19,400 Donor’s Tax Still Due 24,600 Filing of Returns and Payment of Tax The return shall consist of: 1. Each gift made during the calendar year that is to be included in the computation of gift tax 2. The deductions claimed and allowable 3. Any previous net gifts made during the same calendar year 4. The name of the donee 5. Other information required by rules and regulations pursuant to the law Filing of Return- within 30 days after the gift is made - pay as you file, unless with extension not more than six months  Attachments to the Donor’s Tax Return 1. Sworn statement of the relationship of the donor to the donee 2. Proof of claimed tax credit, if applicable 3. Certified true copy if the Original/ Transfer/Condominium Certificate Title of the donated property, if applicable 4. Certified true copy of the latest tax declaration of lot and/or improvement, if applicable 5. Certificate of No Improvement issued by the Assessor’s Office where the donated real properties have not declared improvements, if applicable 6. Proof of valuation of shares of stock at the time of donation if applicable a) For Listed Stocks- newspaper clippings/ certificate issued by SEC as to value of the shares b) For Unlisted Stocks- latest audited Financial Statements of the issuing corporation with computation of the book value per share 7. Proof of valuation of other types of personal properties, if applicable 8. Proof of claimed deductions, if applicable 9. Proof of Tax Debit Memo used as payment , if applicable  Penalties 1. 25% Surcharge- shall be imposed on the following violations: a) Failure to file any return on or before the due date b) Filing a return with a person or office other than those with whom it is required to be filed c) Failure to pay the full or partial amount of tax shown on the return or the full amount of tax due for which no return is required to be filed on or before the due date d) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment No Surcharge of 25% shall be imposed if: a) The donor’s tax return is filed voluntarily b) Without notice from the BIR Commissioner c) It is shown that there was a reasonable cause for failure to file the return d) The failure to file the return was not due to wilful neglect. Penalties 2. 50% Surcharge- shall be imposed on the following violations: a) Willful neglect to file thee return within the period prescribed by the Code or by rules and regulations b) The return filed is false or fraudulent 3. Interest- at the rate of 20% per annum shall be imposed on the basic unpaid amount of tax from the date prescribed for the payment until the amount is fully paid  TAX RATES OF DONOR’S OVER BUT NOT TAX PLUS OF EXCESS TAX SHALL OVER BE OVER ------------ 100,000 EXEMPT ------------- --------------- 100,000 200,000 0 2% 100,000 200,000 500,000 2,000 4% 200,000 500,000 1,000,000 14,000 6% 500,000 1,000,000 3,000,000 44,000 8% 1,000,000 3,000,000 5,000,000 204,000 10% 3,000,000 5,000,000 10,000,000 404,000 12% 5,000,000 10,000,000 1,004,000 15% 10,000,000