P RINCIPLES AND PRACTICE OF TAXATION

Taxation is a common phenomenon all over the world. Most countries cannot do without the
imposition of tax, to boost its revenue generation. There are many definitions given to
taxation by different authors. However, taxation can be explained as a weapon used by any
Government to share from the wealth of an individual or corporate body. Hence, it can be
concluded that taxation is generally an imposition. Taxation is a system of imposing a
compulsory levy on all income, goods, services
and properties of individuals, partnership, trustees, executors, and companies by the government.
This system is supported by law

Three major characteristics of tax are as follows:-

1.Tax is a compulsory contribution imposed by the government on the people in the country.
Any person who refuses to pay is liable to punishment.

2.Tax is a contribution to defray the cost incurred by the state. i.e. to provide goods, public utility
services and so on.

3.Tax is not levied in return for any specific service rendered by the government to the tax payer.
That is individual cannot ask for any special benefit from the state in return for the tax paid by
him.

All tax laws should conform to the Maxims of Taxation

EQUITY 1. Everyone ought to contribute towards the support of the government in proportion
to their income.
CERTAINTY 2. The tax to be paid by each individual ought to be certain, not arbitrary.
CONVENIENCE 3. Taxes ought to be levied in such a manner and at the time most convenient
to the contributor.
ECONOMY 4. The collection cost of taxes ought to be as low as possible.
FORM OF TAXES
The two main forms of taxes are as follows:

Direct taxes
Indirect taxes
DIRECT TAXES

These are taxes levied on the income of individuals and business firm and which is actually
paid by the person in which it is legally imposed.

Examples are as follows:

Personal Income Tax

This is a tax on the income of employees, sole traders, partnerships and pensioners

Company Income Tax

This is a tax charged on the profit/income of companies which are usually corporate economic
entities.

Petroleum Profit Tax

This is a tax levied on companies or entities that engage in prospecting for, or the extraction and
transportation of oil or natural gas.

Capital Gain Tax

This is a tax on the gains arising from the disposal of items of capital nature of companies,
individuals and non-corporate bodies.

INDIRECT TAXES
These are taxes levied on goods and services. Examples of indirect taxes are:

1. Import duties

2. Export duties

3. Excise duties

4. Value Added Tax (VAT)

5. Entertainment, Pool and Casino Taxes

REASONS WHY GOVERNMENT LEVY TAXES

1. To generate revenue.

2. To re-distribute income in a society. In a society where there is great disparity in income

distribution, aggregate demand will fall. Government can pursue a tax system that
imposes heavy burden on people within high income brackets and use the tax revenue to
provide subsidy for goods normally consumed by the low income earners.

3. To discourage consumption of goods that are considered to be socially undesirable such

as goods that are inimical to health.
 4. To meet governments social, economic and political obligations such as the building
Of roads, hospitals, schools, electricity, water and other amenities.

5. To control inflation through fiscal measures.

6. To promote export- a reduction in tax of exported goods will be an additional incentive to

exporters and will create room for more exports.

7. To stimulate growth and development in an economy. Tax policies like tax concessions,
tax holidays could be pursed for rapid industrialization.

8. To preserve foreign exchange reserves:- taxes that reduce import and encourage export
will ensure this.

Who are required to file Income Tax Returns (ITR)?

According to the Bureau of Internal Revenue (BIR), the following people
are required to submit Income Tax Returns:

 Filipino citizens residing in the Philippines receiving income from sources

within or outside the Philippines
 Filipino citizens not residing in the Philippines receiving income from sources
within the Philippines
 Resident or non-resident aliens receiving income from sources within the
Philippines
 Domestic corporations receiving income from sources within and outside the
Philippines
 Foreign corporations receiving income from sources within the Philippines
 Taxable partnerships
 Estates and trusts engaged in trade or business
As you can see, almost everyone who makes money is required to file
and pay income tax.

What is Taxable Income?

Taxable income is the amount of gross income received by the taxpayer
minus any deductions and/or personal and additional exemptions, as
authorized by the Tax Code or other special laws.
 Gross income means all income derived from whatever source. It
includes, but is not limited to, Compensation for services, in whatever
form paid; Gross income derived from the conduct of trade or business
or the exercise of profession; Gains derived from dealings in property;
Interest; Rents; Royalties; Dividends; Annuities; Prizes and winnings;
Pensions; and Partner’s distributive share from the net income of the
general professional partnerships.

Exclusions from Gross Income include Life insurance; Amount received

by insured as return of premium; Gifts, bequests and devise;
Compensation for injuries or sickness; Income exempt under treaty;
Retirement benefits, pensions, gratuities, etc; Miscellaneous item;
income derived by foreign government; income derived by the
government or its political subdivision; prizes and awards in sport
competition; prizes and awards which met the conditions set in the Tax
Code; 13th month pay and other benefits; GSIS, SSS, Medicare and
other contributions; gain from the sale of bonds, debentures or other
certificate of indebtedness; and gain from redemption of shares in
mutual fund.

What are allowable deductions from gross income?

 Optional Standard Deduction – an amount not exceeding 40% of the net sales
for individuals and gross income for corporations; or

 Itemized Deductions – which include the following: Expenses; Interest; Taxes;
Losses; Bad Debts; Depreciation; Depletion of Oil and Gas Wells and Mines;
Charitable Contributions and Other Contributions; Research and Development;
and Pension Trusts

A maximum of P2,400 premium payments on health and/or

hospitalization insurance may also be claimed as deduction, provided
the annual family gross income is not be more than P250,000 and for
married individuals, the spouse claiming this deduction is the one
claiming additional exemptions for the qualified dependents.
 What are allowable personal and additional exemptions?
Individuals who are earning compensation income, engaged in business
or deriving income from the practice of profession are entitled to the
following Personal Exemptions:

 For single individual or married individual judicially decreed as legally

separated with no qualified dependents – P50,000
 For head of family – P50,000
 For each married individual – P50,000 (to be claimed only by the spouse
deriving gross income)

Taxpayers may also claim an Additional Exemption of P25,000 for each

qualified dependents, up to four (4) dependents.

How is income tax payable computed?

The formula to compute the income tax payable is:

 Gross Income
 Less: Allowable Deductions (Itemized or Optional)
 Net Income
 Less: Personal & Additional Exemptions
 Net Taxable Income
 Applicable Tax Rate (see Tax Rate Table below)
 Income Tax Due
 Less: Tax Withheld
 Income Tax Payable

What are the Income Tax Rates in the Philippines?

For individuals earning purely compensation income and those engaged
in business and practice of profession, the applicable income tax table is
as follows:
TAXABLE INCOME TAX RATE

More than But less than

0 P10,000 5%

P10,000 P30,000 P500 + 10% of the Excess over P10,000

P30,000 P70,000 P2,500 + 15% of the Excess over P30,000

P70,000 P140,000 P8,500 + 20% of the Excess over P70,000

P140,000 P250,000 P22,500 + 25% of the Excess over P140,000

P250,000 P500,000 P50,000 + 30% of the Excess over P250,000

P500,000 P125,000 + 32% of the Excess over P500,000 in 2000 and onward