Taxation it is an act of imposing tax.

It is a power inherent in a sovereign state to enforce a charge or a burden upon persons, properties or rights or privileges, to defray the expenses of the government, and to enable it to discharge its appropriate functions. Nature of taxation it is inherent in any independent state. It is exercised by the congress or the legislative branch of government. Under the local government code, the local council can impose taxes within the area of their jurisdiction. Scope of taxation It is unlimited and comprehensive. There are inherent and constitutional limitations, but any limitations will depend on the sense of responsibility of the members of the legislature to its constituents. Inherent limitations: The tax is imposed for public purpose. The power to tax cannot be delegated. Double taxation should be avoided or prevented. Government agencies and instrumentalities are exempted from tax. Tax can be imposed only within the territorial jurisdiction of the state. Tax laws cannot be applied to properties of foreign governments. Double taxation is taxing twice, by the same public authority, within the same jurisdiction or taxing district, for the same purpose in the same year or taxing period. Constitutional limitations: Existing contracts shall not be impaired. No person shall be imprisoned for non- payment of debt or poll tax. Taxation must be uniform and equitable. All kinds of land, buildings and improvements actually, directly or exclusively used for religious or charitable purposes are exempt from taxation. Basic principles of a sound tax system Fiscal adequacy the source of revenue must be enough to sustain the finances of the government Theoretical justice taxes must based on the taxpayers ability to pay. Administrative feasibility taxes must be able to implement efficiently and effectively. Taxes distinguished from eminent domain Concept of eminent domain it is the power of the state to take or control private property for public use after paying the owner a just compensation to be determined according to law. Taxation applies to all persons, properties or rights (national coverage). Eminent domain applies only to a particular owner of property. In taxation, there is payment of taxes to the government by the taxpayer. In eminent domain, there is the taking of property by the government. In taxation, the taxpayer is presumed to receive benefits from the government directly or indirectly. In eminent domain, the owner of the property receives a fair and just compensation from the government. Taxation distinguished from police power: Concept of police power it is the right of the state to enact laws in relation to properties or persons as may promote public health, public morals, public safety and the general welfare of the people. The purpose of taxation is to raise revenues. The purpose of police power is for regulation. In taxation, there is no limit on the amount of tax to be imposed. In police power, the license fee is just enough to implement the regulation. Classification of taxes

a.

b.

c.

d.

e.

f.

As to subject matter: 1. Personal or capitation or poll tax fixed amount on all persons who are residents within a specific territory. 2. Property tax tax assessed on all properties located within the jurisdiction of the taxing authority, in proportion to its value or in some method of apportionment. 3. Excise tax a tax which Is not personal or property. As to who bears the burden 1. Direct tax The one who pays shoulders the tax. 2. Indirect tax The one who pays shifted the burden of the tax to someone else. As to determination of amount: 1. Specific tax a tax which imposes a specific amount per head or number, or some standard of weight or measurement. 2. Ad valorem tax a tax based on the value of the article subject to tax. It is a certain percentage of the invoices or appraised value of the article or product subject to tax. As to purpose: 1. General tax tax levied to raise revenues for the government. 2. Special tax tax levied for special purpose. As to scope 1. National tax tax levied by the national government. 2. Local tax tax levied by the local government. As to proportionality 1. Progressive or graduated increase in the tax rate is proportionate to the increase in tax base. Ex. Income tax 2. Regressive increase in the tax rate is not proportional to the increase in tax base. We do not use this kind of taxation. 3. Proportional fixed percentage of amount of the base (e.g. value of the property, or gross receipts) Ex. Value added tax (VAT), real property taxes.

Some doctrines in Taxation 1. 2. Prospectivity of tax laws tax laws must be imposed not retroactively but forwardly. Indirect double taxation Ex. When business tax is imposed by the municipal government prior to the issuance of business license to a taxpayer for engaging in an advertising business. His income from his advertising business shall later be imposed income tax by the national government Set-off of taxes are not subject to offsetting of the claims that the taxpayer may have against the government. Escape from taxation avoiding or evading tax. a. Shifting is the transfer of the burden of the tax to someone else. Ex. Indirect tax b. Capitalization the reduction in the price of taxed object equal to the future value of the taxes to be paid, which the purchaser expects to pay. c. Transformation is the method of improving the process of production, turning out his units of product at a lower cost. d. Evasion use of illegal or fraudulent means to avoid or lessen the payment of tax. e. Avoidance use of legal means to prevent or reduce tax liability. f. Exemption is the granting of immunity to a certain taxpayer so that it will not pay tax.

3. 4.

Situs of taxation it is the place of taxation. It is the avenue wherein the state can collect or levy a subject being taxed if he has a situs under its jurisdiction. 1. 2. 3. 4. Persons residence of the taxpayer Real property or tangible property location of the property Intangible personal property domicile or the taxpayer unless he acquired a place elsewhere Income taxpayers residence or citizenship, or place the income was earned.

5. 6.

Business, occupation and transaction place where business is operated or located, occupation is practiced and transaction is completed. Gratuitous transfer of property taxpayers residence or citizenship, or location of the property.

Tax differentiated from toll. Meaning of toll it an amount paid for the use of a road, bridge, or the like of a public nature. A toll is a demand of the owner and is paid for the use of anothers property and maybe imposed by individual private or government entities, while tax is a demand of the state for the support of government. Tax differentiated from penalty Penalty is any sanction imposed as a punishment for violation of law. A penalty is designed to discipline the conduct of the subject and it may be imposed by the government or private individuals or entities. Tax is primarily aimed at raising revenues and maybe imposed only by the government.

Tax differentiated from special assessment Special assessment is an enforced contribution from owners of land for special benefits resulting from public improvements. Special assessment is levied only on land, is not a personal liability of the person assessed, is based wholly on benefits. Tax is levied on persons, properties or rights, which may be made a personal liability of the person assessed, is based on necessity and is of general application. From permit or license fee Permit or license fee is a charge imposed under the police power of the state for purposes of regulation. License fee is imposed for regulation and involves the exercise of police power, while tax is imposed for revenue and involves the exercise of the taxing power. Failure to pay a license fee makes an act illegal, while failure to pay a tax does not necessarily make an act illegal. From debt A debt is based on contract, is assignable and maybe paid in kind. While a tax is based on law, cannot be assigned and is paid in money. A person cannot be imprisoned for non-payment of debt while he can be imprisoned for non-payment of tax. From Revenue It is broader than tax since it includes all funds or income derived by the government aside from taxes. Other sources of funds by the government are servicesm income from public enterprises and foreign loans. From custom duties Custom duties are taxes imposed on goods exported from or imported to a country. Custom duties are also taxes but the latter is broader in scope. Powers and duties of the BIR 1. 2. a. b. Officers Chief Commissioner and seven (7) deputy commissioners. Powers and duties: Assessment and collection of all national internal revenue taxes, fees and charges; Enforcement of all forfeitures, penalties and fines;

c. d. e. f. g. h. 1.) 2.)

Execution f judgments in all cases decided in favor by the court of tax appeals and ordinary courts. Administration of supervisory and police powers conferred to it. Interpret tax laws and decide tax cases Obtain information, and to summon, examine, and take testimony of persons. Make assessments and prescribe additional requirement for tax administration and enforcement. The commissioner has the power to inquire bank deposits of: Decedent to determine his gross estate. Any taxpayer who has filed an application for compromise of his tax liability.

This is exempted under RA no. 1405 or Secrecy of Bank Deposit Law. Concept of Income Tax and Income Income tax is a tax on all annual profits realized from property , profession or from doing trade or business, whether single proprietorship, partnership, or corporation or as a tax on persons income, emoluments, profits and the like. Income tax is regarded as an excise tax. Income means all profits, gains which flow into the taxpayer during a definite period of time, but not the return on capital. It also includes gains from the sale of capital assets. Requisites for income to be taxed: 1. 2. 3. There must be a gain or profit. The gain must be realized or received. The gain must be excluded by law or international treaty.

Accounting methods recognized by the tax code 1. Principal methods a. Cash basis b. Accrual basis c. Hybrid method Crop-year basis Deferred payment sales a. Installment basis b. Deferred payment basis Percentage of completion basis (long-term contracts) Leasehold improvements a. Income over the term of the lease basis b. Income in the year of completion basis In general, any method of accounting that correctly reflects the income of the taxpayer for each taxable year will do.

2. 3.

4. 5.

6.

Main methods 1. 2. 3. Cash basis income earned but not yet received is not recognized as income and expenses not yet paid is not recognized as expenses. Accrual basis the opposite of cash basis. Crop year basis expenses in the production of crops are deducted in the year the gross income from the crop has been realized. It is applicable only to farmers producing crops. It may take more than a year. ( from the time of planting to the time of disposal)

Installment and deferred payment sales

(See Illustrative example)

4.

Long term contracts means building, installing or contracting contracts covering a period in excess of one year. A person whose gross income is derived from long term contracts shall report his income on the basis of percentage of completion. The computation must be supported by certifications from a reliable architect and engineering consultants showing the percentage of completion during the taxable year of work done under the contract.

5.

Leasehold improvements sometimes the lessee make permanent improvements on the property leased, under an agreement that upon the expiration of the lease contract, the improvement will be for the lessor. It therefore behooves that the lessor must recognize income from the improvements. 1. Income from leasehold improvements shall be reported at the time the buildings or improvements are completed. 2. Income from leasehold improvements shall be divided over the life of the lease (See Illustrative example)

Taxable income it is gross income less deductions and personal and additional exemptions if any. Gross income depends upon the source of income of the taxpayer. A, Employment Compensation for the services rendered B. Business Net sales less Cost of sales 1. Gross income/profit derived from the conduct of trade or business or exercise of profession. 2. Gains derived on the sale of properties or assets. 3. Interests 4. Rents 5. Royalties 6. Dividends 7. Annuities 8. Prizes and winnings 9. Pensions and 10. Partners distributive share from the net income of a general professional partnership. Definition of income Income is the amount of money (cash or its equivalent) received by a taxpayer (person or artificial being) within a specific period of time, whether as payment of services, interest or profit from investment. It may also be defined as the flow of fruits from ones labor. Capital is wealth. Income is the flow of wealth. Capital is a tree, while income is the fruit.

Income tax is a tax on all annual profits arising from trade or business, exercise of a profession or use or sale of property, or is a tax on persons compensation through employment. It is generally an example of excise tax. Income tax is based on income either gross or net, realized in one taxable year. Compensation Income Definition It means all remuneration for services rendered by a employee for his employer under an employee-employer relationship, unless specifically excluded by the Code. Thus, it includes salaries, wages, emoluments, honoraria, allowances, commissions, (e.g. transportation, representation, entertainment and the like); fees including directors fees and other income of similar nature. If services are paid in kind other than money (e.g. stocks, bonds or other forms of property) its fair market value should be taken as payment.

Forms of compensation 1. 2. 3. 4. Money In kind such as stocks, bonds, or other forms of property. Fair market value The value of quarters or meals so furnished should be added to remuneration. De minimis benefits are not considered as compensation such facilities or privileges are relatively of small value and are given to employees to promote their health, goodwill, contentment, and efficiency. a. Monetized unused vacation leave credits of employees not exceeding 10 days during the year. b. Medical cash allowance to dependents of employees not exceeding P750 per employee per semester or P125 per month. c. Rice subsidy of P1,500 or one (1) sack of 50-kg rice per month amounting to not more than P1,500. d. Uniforms and clothing allowance not exceeding P4,000 per annum. e. Actual yearly medical benefits not exceeding P10,000 per annum. f. Laundry allowance not exceeding P300 per month. g. Employee achievement awards, e.g. for length of service or safety achievement, with an annual monetary value of P10,000, under an established written plan, which does not discriminate highly paid employees. h. Gift given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum. i. Flowers, fruits, books or similar items given to employees under special circumstances, e.g. on account of illness, marriage, birthday, birth of a baby, etc. j. Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage.

The excess from the above ceiling prescribed, shall be considered as part of other benefits, which are taxable to the employee receiving the benefits, if such excess is beyond the P30,000 ceiling. 5. Fringe Benefits is an employee benefit supplementing a money wage or salary. It maybe in the form of food, service, or other benefit furnished or granted in cash or in kind. A salary or wage given to an employee cannot be reduced, while a fringe benefit maybe discontinued or reduced. It is not a part of the basic pay to compute for OT pay, separation pay, etc. as a basis. a. Basic rules on fringe benefit and fringe benefit tax. 1.) Fringe benefit given to a rank and file employee (whether under a collective bargaining agreement or not) is not subject to the fringe benefit tax. 2.) Fringe benefit given to a supervisory or managerial employee is subject to the fringe benefit tax. 3.) De minimis benefits, whether given to rank and file employee or to a supervisory or managerial employee is not subject to the fringe benefit tax.

Examples of fringe benefits given to a supervisory or managerial employees subject to fringe benefit tax: Housing, expense accounts, vehicle of any kind, housing personnel such as maid, driver and others, interest on loan at less than market rate to the extent of difference between the market rate and actual; membership fees, dues and other expenses in social and athletic clubs or other similar organizations; expenses for foreign travel; holiday and vacation expenses, educational assistance

to the employee or his dependents; life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. Exemptions from tax are as follows: a. b. c. d. e. Benefit required by the nature of, or necessary to the trade, business or profession of the employer. Benefit for the convenience or advantage of the employer (convenience of the employer rule) Benefit which is authorized and exempted from tax under special law. Contribution by the employer for the benefit of the employee to retirement, insurance, and hospitalization benefit plans. De minimis benefits.

Computation of fringe benefit tax: 1. 2. Determine the grossed-up monetary value of the fringe benefit. This is the monetary value of the benefit divided by sixtyeight percent (68%); Compute the fringe benefit tax by multiplying the grossed-up monetary value of the fringe benefit by thirty two percent (32%).

The fringe benefit tax is a final tax that should be withheld by the employer and paid on or before the tenth day of the month following the calendar quarter in which the fringe benefit was granted. Exclusions from gross income: A. Direct exclusions under NIRC 1. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured. 2. The amount received by the insured as a return of premium paid by him under life insurance, endowment or annuity contract. 3. The value of the property acquired by gift, bequest, devise or descent. 4. Amount received through accident or health insurance, or under Workmens Compensation Act as compensation for personal injuries or sickness. 5. Income of any kind to the extent required by any treaty binding upon GOP. 6. Payment of benefit due to any person residing in the Phils under US laws administered by US Veterans Administration. 7. Interest derived from investment in the Philippines by foreign governments or institutions. 8. Income derived from any public utility or from the exercise of any essential government functions accruing to GOP or to any political subdivision. 9. Prizes or awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement. 10. Prizes or awards granted to athletes in local or international sports competition sanctioned by their national sports associations. 11. Gains realized from the sale or exchange or retirement of bonds, debentures, or other certificate of indebtedness with a maturity of more than 5 years. 12. Gains realized by the investor upon redemption of shares of stock of a mutual fund company. B. Exemptions which have special significance to an employee or wage earner: 1. GSIS, SSS, Philhealth and Pagibig contributions and union dues of individuals. 2. Gross benefits received by officials and employees of public or private entities, as thirteenth month pay and other benefits, but the total exclusion shall not exceed thirty thousand pesos (P30,000). Example: Productivity incentive pay, and Christmas bonus. 3. Benefits received or enjoyed under the SSS or GSIS. 4. Retirement benefits received under RA No. 7641 and those received by employees of private firms with a reasonable private benefit plan. 5. Amount received by an employee or its heirs as a consequence of separation from the service because of death, sickness or other physical disability or for any cause beyond the control of the employee.

6. 7. C.

Social security benefits, retirement benefits, pensions, and other similar benefits received by a resident or non-resident citizen of the Philippines or resident alien. Minimum wage earners shall be exempt from the payment of income tax.

Other Exemptions under NIRC: 1. Interest on long term deposits or investments in banks (with a maturity of 5 years or more) except for non-resident aliens not engaged in business or practice of profession in the Phils. 2. Interest received by a non-resident individual or non-resident corporation from deposits under the FCDU system. 3. Dividends received by a domestic or resident corporation. (Intercompany dividend) 4. De Minimis benefits received by a managerial or supervisory employee. 5. Income tax shall not apply to an employees trust which forms part of pension, stock bonus, or profit sharing plan of an employer for the benefit of some or all of his employees

Application of Installment and Deferred Payment Method Payment of capital gain tax in installment F Co., a domestic corp, on January 2, 2009 sold a piece of land in USA, held as capital asset with data as follows: SP P2,000,000 FMV P1,800,000 Cost P1,000,000 Payment as follows: DP P 500,000 Jan 2, 10 P1,000,000 Jul 2, 10 P 500,000 Installment method of reporting income On Nov 5 2009, Mr. B sold a piece of land held as ordinary asset on installments. Data are as follows: SP P1,000,000 Cost P500,000 Mortgage P600,000 Payments: DP of P130,000 and installment payments of P20,000 every month thereafter except for last month P30,000. Determination of gross profit: SP P1,000,000 Cost P 500,000 GP P 500,000 Determination of initial payments: DP in 2009 P130,000 Ins payment 20,000 Excess of mortgage Over cost P100,000 Init, paymt P250,000 Determination of contract price: SP P1,000,000 Mortgage (600,000) Excess of Mortgage over cost 100,000 Contract Price 500,000 Determination of income to report: 2009: P500,000/P500,000 x P250,000 = P250,000 2010: P500,000/P500,000 x P250,000 = P250,000 Installment method of reporting capital gain On Jun 1 2009, Mr. P sold bonds held as capital assets on installments: Data are as follows: SP P200,000 Cost P100,000 Payments: 2009: DP P25,000 Dec 1 2009 P25,000 2010: Jun 1 2010 P75,000 Dec 12010 P75,000

Illustrative Problem

Step 1

Step 2 Initial payments must not exceed 25% of the selling price

Determination of capital gain tax: SP 2,000,000 FMV 1,800,000 CGT 120,000 Determination of initial payments: IP in 2009 500,000 (not xceeding 25% of SP)

Determination of capital gain: SP P200,000 Cost 100,000 GP 100,000 Determination of initial payments: DP in 2009 P25,000 Payment: 12/1/2009 P25,000 Init paymt P50,000 Selling Price is the contract Price

Step 3. If there is no mortgage, the contract price is the selling price

Selling Price is the Contract Price

Step 4. Computation

Determination of installment payments on the tax: Jan 2, 2009 P120.000/P2,000,000 x 500,000 = P30,000

Determination of capital gain to be reported: 2009: P100,000/P200,000 x P50,000 = P25,000 50% thereof P12,500 P100,000/P200,000 x

January 28, 2010 P120,000/P2,000,000 x P1,000,000 = P60,000 July 2, 2010 P120,000/P2,000,000 x P500,000 = P30,000 However, if the initial payments is more than 25%, it can be reported on the basis of deferred payment method Not applicable L Co, a real estate dealer, sold on Dec 1 2008 a piece of real estate with the ff. data: SP P3,000,000 Cost P1,200,000 DP P1,000,000 Mort. Note P2,000,000, payable at P1,000,000 on Dec 1, 2009, and P1,000,000 On Dec 1, 2010. It has a FMV of 85% of its face value.

P150,000 = P75,000 50% thereof P37,500

In 2008: Collected P1,000,000 FMV of note: P2,000,000 X 85% P1,700,000 Total amt P2,700,000

In 2009: Collected P1,000,000 Less: Income prev. reported: 85% x P1M 850,000 Income 150,000

On Jun 1 2009, Mr. S sold shares of stock of a resident corporation held as capital assets for 20 months. Data are as follows: SP P200,000 Cost P100,000 DP P 50,000 Balance is secured by a mortgage note, the FMV is 90% of its face value. Payments were as follows: 12/1/2009 P50,000 6/1/2010 P50,000 12/1/2010 P50,000 In 2009: Collected: Date of sale P50,000 12/1/2009 P50,000 FMV of the Note=,9xP100,000 P90,000 Total 190,000 Less: Cost 100,000 Capital gain 90,000 50% thereof 45,000 In 2010: Cash received: 6/1/2010 P50,000 12/1/2010 P50,000 Total P100,000 Less income prev. reported 90,000 Capital gain 10,000 50% thereof P5,000

In 2010: Collected P1,000,000 Less: Income prev. Reported: 85% x P1M 850,000 Income 150,000