Lecture Notes XIII Selected Topics on Philippine Taxation Jai Leonard I.

Carinan

Lecture Notes XIII Selected Topics on Philippine Taxation I. Sources of Revenue from Internal Revenue Tax Internal Revenue Taxes are taxes that are specifically provided by R. Internal Revenue Code of the Philippines !"#"$ The National

Section #% of the NIRC provides the follo&in' taxes( fees and char'es that are dee)ed to be National Internal Revenue Taxes* %. Income tax is the right to earn an inco)e by en'a'in' in an occupation( the basis of &hich is the net taxable inco)e. #. Business tax is the right to )a+e an onerous transfer in the nor)al conduct of business( the basis of &hich is the net sale or 'ross receipts. a. ,eneral Consu)ption tax or other percenta'e taxes$ refers to percenta'e taxes on sales or 'ross receipts of non$ - T business. Percenta'e taxes are basically levied on the retail sales before consu)ption b. -alue$added tax$ is levied on the consu)ption of 'oods and utili.ation of services in the Philippines $ The value added tax is applied on every sta'e of distribution of )aterials( supplies and services purchased. c. /xcise tax$ This is co))only levied on production and i)portation of products that are 'enerally har)ful to health $0sin products(0 these are collected &ith excise tax. 1nder the Tax Code( sin products include tobacco( alcohol and luxury ite)s( a)on' others. $Not all production and i)portation are sub2ect to excise tax. 3nly those 'oods that are either har)ful or &asteful are sub2ect to excise tax to discoura'e their consu)ptions and usa'e

Note* In 'eneral( inco)e tax is paid only &hen there is net inco)e. 4hen there are losses( inco)e tax is not to be paid( except &hen the inco)e of a corporation is sub2ect to )ini)u) corporate inco)e tax 56CIT7. 8o&ever( the business is re9uired to pay business tax &hether there is net inco)e or loss because the basis of business tax is net sales or 'ross receipts.

:. Transfer tax is the right to )a+e casual and 'ratuitous transfer of one;s property to the other person. a. /state tax$ The transfer could be upon the death of the previous o&ner &hich &ould be sub2ect to estate tax

Lecture Notes XIII Selected Topics on Philippine Taxation Jai Leonard I. Carinan

- It is levied on the decedent<s estate and not on the heir receivin' the property. $ The ob2ect of estate tax is to tax the transfer of econo)ic benefits and en2oy)ent of property fro) a decedent person to the heir. b. =onor;s tax$ >,ift Tax? the transfer could be durin' the lifeti)e of the donor 5donation inter$vivos7( &hich &ould be sub2ect to donor's tax. $ Is an excise tax i)posed on the ri'ht to transfer 'ratuitously( directly or indirectly( real and personal properties( tan'ible or intan'ible out of the o&ner<s liberality in favor of another that accepts the 'ift. $ =onor<s tax is not i)posed on the donor( donee or property donated but upon the ri'ht of the donor to donate

". Documentary stamp tax$ is the tax on the right to enter into a transaction that is described in the docu)ent needed to be filed in any 'overn)ent office. II. Personal Income Tax Inco)e$ Inco)e )eans all &ealth( &hich flo&s into the taxpayer other than as a )ere return of capital. ,ross Inco)e$ ,ross inco)e )eans all inco)e derived fro) &hatever source ,ross inco)e )eans all inco)e derived fro) &hatever source Co)pensation for services( in &hatever for) paid( includin' but not li)ited to fees( salaries( &a'es( co))issions and si)ilar ite) ,ross inco)e derived fro) the conduct of trade or business or the exercise of profession ,ains derived fro) dealin's in property Interest Rents Royalties =ividends nnuities Pri.es and &innin's Pensions Partner;s distributive share fro) the net inco)e of the 'eneral professional partnerships

/xclusions fro) 'ross inco)e Life insurance )ount received by insured as return of pre)iu) ,ifts( be9uests and devises Co)pensation for in2uries or sic+ness Inco)e exe)pt under treaty

Lecture Notes XIII Selected Topics on Philippine Taxation Jai Leonard I. Carinan

Retire)ent benefits( pensions( 'ratuities( etc. 6iscellaneous ite)s inco)e derived by forei'n 'overn)ent inco)e derived by the 'overn)ent or its political subdivision pri.es and a&ards in sport co)petition pri.es and a&ards &hich )et the conditions set in the Tax Code 13th month pay and other enefits! "ross enefits received y officials and employees of pu lic and private entities# Provided$ ho%ever$ That the total exclusion under this su para&raph shall not exceed Thirty thousand pesos 'P3($((()$ in excess of this amount is su *ect for taxation ,SIS( SSS( 6edicare and other contributions 'ain fro) the sale of bonds( debentures or other certificate of indebtedness 'ain fro) rede)ption of shares in )utual fund

Taxable Inco)e$ )eans the pertinent ite)s of 'ross inco)e specified in the Tax Code less the deductions and@or personal and additional exe)ptions( if any( authori.ed for such types of inco)e( by the Tax Code or other special la&s. Republic ct No. ABC" CT N3. !"#"( S R/-/N1/ 3E %AAD N CT 6/N=IN, S/CTI3N ##( #"( :"( :B( B%( N= DA 3E R/P1FLIC 6/N=/= 3T8/R4IS/ GN34N S T8/ N TI3N L INT/RN L

Salient points of Repu lic +ct No. ,-(. a. Those )ini)u) &a'e earners shall be exe)pt fro) the pay)ent of inco)e tax on their taxable inco)e* Provided( further( that the holiday pay( overti)e pay( ni'ht shift differential pay and ha.ard pay received by such )ini)u) &a'e earners shall li+e&ise be exe)pt fro) inco)e tax. b. 3ne of the hi'hli'hts of R ABC" is the increase in tax exe)ption( ho& )uch is the ne& annual personal and additional tax exe)ption as co)pared to the exe)ptions in the old tax exe)ption la&H
N/4 Personal /xe)ption Sin'le 8ead of the Ea)ily 6arried dditional /xe)ption Eor every Iualified =ependent BC(CCC.CC BC(CCC.CC BC(CCC.CC 3L= #C(CCC.CC #B(CCC.CC :#(CCC.CC

#B(CCC.CC

!(CCC.CC

There shall be allo&ed a basic personal exe)ption a)ountin' to Eifty thousand pesos 5PBC( CCC7 for each individual taxpayer. 0In the case of )arried individual &here only one of the spouses is derivin' 'ross inco)e( only such spouse shall be allo&ed the personal exe)ption. 0Additional Exemption for Dependents. $ There shall be allo&ed an additional exe)ption of T&enty$five thousand pesos 5#B(CCC7 for each dependent not exceedin' four 5"7. 0The additional exe)ption for dependents shall be clai)ed by only one of the spouses in the case of )arried individuals.

Lecture Notes XIII Selected Topics on Philippine Taxation Jai Leonard I. Carinan

0In the case of le'ally separated spouses( additional exe)ptions )ay be clai)ed only by the spouse &ho has custody of the child or children* 0dependent0 )eans a le'iti)ate( ille'iti)ate or le'ally adopted child chiefly dependent upon and livin' &ith the taxpayer if such dependent is not )ore than t&enty$one 5#%7 years of a'e( un)arried and not 'ainfully e)ployed or if such dependent( re'ardless of a'e( is incapable of self$support because of )ental or physical defect.

+NN/+L 0IT112L3IN" T+X T+4L5 If Taxa le Income is# % # : " B L D Not 3ver %C(CCC 3ver %C(CCC 3ver :C(CCC 3ver DC(CCC 3ver %"C(CCC 3ver #BC(CCC 3ver BCC(CCC ut not over ut not over ut not over ut not over ut not over :C(CCC DC(CCC %"C(CCC #BC(CCC BCC(CCC J J J J J J J -(( 7$-(( 8$-(( 77$-(( -($((( 17-$((( K K K K K K Tax 3ue is# -6 1(6 over 1-6 over 7(6 over 7-6 over 3(6 over 376 over

of the excess %C(CCC of the excess :C(CCC of the excess DC(CCC of the excess %"C(CCC of the excess #BC(CCC of the excess BCC(CCC

Sa)ple Tax Co)putation* Step %* =eter)ine your total ,ross Inco)e Step #* Co)pute for the Taxable Inco)e Step :* Co)pute for the Tax =ue
!ote" #a$e sure that items prior to this are revie%ed and understood

,iven %*

sin'le e)ployee &ith an annual 'ross inco)e of P%LC( CCC( ho& )uch is the annual tax due
Items ,ross Inco)e Less* Personal M dditional /xe)ption %LC(CCC Notes

BC(CCC 3ver DC(CCC but not over %"C(CCC J !(BCC #CN of the excess over DC(CCC

Taxable Inco)e

%%C(CCC

Lecture Notes XIII Selected Topics on Philippine Taxation Jai Leonard I. Carinan

Tax =ue

%LBCC

!BCCK .#C5%%C(CCC$DC(CCC7

,iven #* 6arried e)ployee &ith : children all under the a'e of #%( &ith a spouse that is currently not &or+in' on that taxable year. 4ith a )onthly salary of P"L( CCC and received a %: th )onth pay of &orth P "L(CCC. t the sa)e ti)e earned a total of P#C( CCC on interest bearin' account. 8o& )uch is the annual tax dueH

Items ,ross Inco)e Salary and 4a'es Interest inco)e %:th 6onth pay Less* Personal M dditional /xe)ption Personal /xe)ption dditional /xe)ption B!!(CCC BB#CCC #CCCC %LCCC

Notes Su) of the different inco)e sources covered by Tax code annual inco)e is "L(CCC O %# )onths interest fro) the savin's In excess of :C(CCC is taxable so "LCCC$:CCCC is taxable

%#B(CCC BC(CCC DBCCC

Su) of the exe)ptions The nor)al exe)ption 9ualified dependents #B(CCCO: children 3ver #BC(CCC but not over BCC(CCC J BC(CCC :CN of the excess over #BC(CCC BCCCCK .:C5"L:(CCC$#BC(CCC7

Taxable Inco)e Tax =ue

"L:(CCC %%:ACC

III. 9alue +dded tax - T is a consu)ption tax i)posed on the sale or i)portation of 'oods and services in the ordinary course of business. - T passes several distribution sta'es $ fro) the distributor to the &holesaler to the retailer and finally to the ulti)ate consu)er. t each sta'e( the seller 5except for the ulti)ate consu)er7 adds a )ar+$up to his purchase cost to )a+e profit. The seller shifts the - T burden to the buyer. Conse9uently( this tax finally accu)ulates and to be borne by the ulti)ate consu)er. 0hat are the salient features of the R+ ,33: The Reformed 9alue +dded Tax La%; The %CN - T rate is retainedP ho&ever( the President shall increase the - T rate to %#N startin' January %( #CCL if any of the conditions i)posed by R A::D is satisfied.
The follo&in' 'oods and services are no& sub2ect to - T* Petroleu) products and other indi'enous fuels Power and electric cooperatives

Lecture Notes XIII Selected Topics on Philippine Taxation Jai Leonard I. Carinan

Services rendered by doctors Services rendered by lawyers Domestic carriage of passengers by air and sea Non-food agricultural products Works of art, literary works, musical compositions

9+T exemption of asic commodities a. b. c. d. 'ricultural and )arine food products in ori'inal state such as ve'etables( )eat( fish( f e''s and riceP /ducational services rendered by both public private educational institutionsP Foo+s( ne&spapers and )a'a.inesP Lease of residential houses not exceedin' P%C( )onthlyP

e. Sale of lo&$cost house and lot not exceedin' #.B )illionP and f. Sales of persons and establish)ents earnin' not )ore than P%.B )illion annually &hich could include sari$sari store( carinderias( and street vendors.

0hy should the 9+T rate

e increased from 1(6 to 17 NH

This is part of a bi''er effort to address the country;s bud'et deficit. 4e need to increase our tax

collection to sustain the 'overn)ent;s delivery of basic services. 4hile &e can conceptually reduce 'overn)ent expenditures( &e can only reduce it by so )uch because the public relies on 'overn)ent for these basic services( &hich include education and )edical services.
If &e increase the - T rate fro) %CN to %#N in #CCL( &e can raise as )uch as P:B.%# billion

)ore. 3n the other hand( if this )easure is coupled &ith the repeal of the - T exe)ptions )entioned above and other provisions of the - T bill( &e can raise up to P!%."% billion assu)in' a DCN collection efficiency.
Raisin' these additional revenues is expected to translate to the stren'thenin' of the Peso$

=ollar exchan'e rate and better interest rates arisin' fro) i)proved investor perception of the Philippines. Non!9+T reform measures 'Income Tax)# a. Increases corporate inco)e tax rate to :BN up to the end of #CC!P the rate &ill be auto)atically :CN by #CCA b. Increases 'ross receipts tax fro) BN to DN on royalties( rentals of property $ real or personal profits for) exchan'e and all other ite)s treated as 'ross inco)e( of ban+s and non$

Lecture Notes XIII Selected Topics on Philippine Taxation Jai Leonard I. Carinan

ban+ financial inter)ediaries c. Re)oval of P ,C3R;s inco)e tax exe)ption

Incremental revenue earmar<in& a. BCN of local 'overn)ent units; share in incre)ental - T collection &as ear)ar+ed for the follo&in' purposes* %. Public ele)entary and secondary education. finance construction of school buildin's( furniture and in$service trainin' of teachers #. 8ealth pre)iu)s of enrolled indi'ents :. /nviron)ental conservation ". 'ricultural )oderni.ation to finance construction of far)$to$)ar+et roads and irri'ation facilities 4ho &il l be a r t he he a vi e r bur de n of - TH Since - T is a consu)ption tax( its burden is heavier on those &ho consu)e )ore - Table 'oods and services.
6ost of the 'oods consu)ed by lo&er inco)e fa)ilies are - T exe)pt. Fased on the spendin' profiles of Eilipino fa)ilies across inco)e classes( those fa)ilies spendin' not

)ore than PLC( CCC annually spend only C.#N of their expenditures on taxes 5- T( excise and other taxes7. This is lar'ely because of their purchases of - T$exe)pt 'oods 5such as foodstuffs consu)ed at ho)e( &hich constitute )ore than LCN of their purchases7. 3n the other extre)e( those fa)ilies spendin' up&ards of P#BC( CCC annually spend at least ".%CN of their expenditures on taxes( lar'ely because they consu)e )ore - Table 'oods and services. 4ha t i s t he 'over n )e nt doi n' to a ddr e s s c or r upt i on a nd ta x eva s i onH 3peration* R T/ 5Run fter Tax /vaders7 &as launched to prosecute tax evaders( &hile 3peration* R TS 5Run fter the Smugglers) was launched to prosecute smugglers !"PS #!evenue "ntegrity Protection Service)
was also launched to prosecute corrupt revenue officers and employees

It is also i)portant that citi.ens help ensure that the - T they paid &ill 'o to the 'overn)ent. 3ne &ay of doing this is by asking for official receipts every time payment is made for $%&able goods and
services

4enefits from 9+T !ational Progress The - T syste) &ill support econo)ic and public service infrastructure. The - T syste) &ill sustain econo)ic 'ro&th* a . I t p r o vi d e s a n o p p or t u ni t y t o f os t e r ' l o b a l co)petitiveness of the Philippine export productsP

Lecture Notes XIII Selected Topics on Philippine Taxation Jai Leonard I. Carinan

b. It provides an opportunity to build up the country;s dollar reserves. &urving Tax Evasion and 'raud The - T syste) encoura'es the issuance of receipts &hich is necessary to accu)ulate input tax credits that &ill )ini)i.e output tax liability. The receipts &ill leave an audit trail or evidence for )onitorin' purposes and effective tax ad)inistration (igher )overnment *evenues The - T syste) has a &ider tax base that &ill enable the 'overn)ent to 'enerate )uch needed revenues to support and enhance public service. It &ill also support a )ore efficient public ad)inistration.

References# -alencia( /d&in ,. and ,re'orio E. Roxas. Transfer and Fusiness Taxation Principles and La&s &ith ccountin' pplications. Fa'uio City* -alencia /ducational Supply( #CCA. Fureau of Internal Revenue( &&&.bir.'ov.ph@taxinfo@taxQincome.ht)l =epart)ent of Einance. 4hat you need to +no& about R dded Tax La&. &&&.vatrefor).'ov.ph *epu lic Act +,-./ T h e Refor)ed &&&.la&phil.net@statutes@repacts@...@raQ,-(.Q#CC!.ht)l -alue A::D The Refor)ed -alue dded Tax La&