Lesson Presentation

Introduction

When you hear the word taxation, what comes into your mind? Most of us would
simply interpret it as a burden that reduces our income. The Government’s way of
earning through the hard-earned money of the people. In this lesson, you will
understand what the importance of taxation is and why is it being imposed by the
Government. You will also understand the different types of taxes and their uses.

Objective No. 1: Cite the concept and nature of a business from the point
of view of taxation.
What is taxation and why is it being levied upon our income?

Let us understand the definition and purpose of taxation deeply as follows:

For us to understand the rationale behind taxation, we must understand its history
and the concept of a busines in the modern world.

Tax emerges from the blurry past as being part of the ancient empires. Empires
such as the Egyptian, Mesopotamian, Chinese, and Inca were theocratic: the
religion and the government were mixed - the king/emperor was viewed as a god.
Paying tribute to this leader was both a religious contribution and a governmental
extraction.
In the Philippines, tax imposition started with the coming of the Spaniards in 1521.

Today, taxes are used not as a tribute to the state’s leader but as a means for
them to perform their duties to the people.

The concept of the modern business enterprise, on the other hand, is a social and
economic institution. Business by itself is not an end but a means to an end. It has
a responsibility to the public and as such, should corroborate with the goals of the
government to promote social welfare.
The government with its sovereign power, also has a responsibility to the people
to promote its socio-economic welfare.

With this in mind, it would be easier to understand that Government tax citizens,
and citizens demand accountability from their government as the other part of this
bargain. Direct taxation (such as income taxes) generates the greatest degree of
accountability and better governance, while indirect taxation tends to have smaller
effects.

There is several importance of the power of taxation.

So in theory, the government generates revenue from the taxes that they are able
to collect from the individuals and businesses within the country to perform both
their social and economic responsibility.

The Philippine tax system covers national and local taxes. National taxes refer to
national internal revenue taxes imposed and collected by the national government
through the Bureau of Internal Revenue (BIR) and local taxes refer to those
imposed and collected by the local government.

In the next section, we will discuss the different types of tax imposed on persons
and properties.
Objective No. 2: Enumerate and discuss the different types of businesses
and the taxes they are required to pay.

Your company’s form will affect:

 How you are taxed

 Your legal liability
 Costs of formation
 Operational costs

In this section, we will learn how a particular business is taxed and what are the
types of business taxes they are required to pay.
With the above classification, where do you think is business tax and transfer tax
classified?

Before we can answer this, let us first differentiate business tax and transfer tax.

Business tax, as the term implies, are taxes imposed on businesses. These are
taxes imposed on onerous transfers or simply sale. There are several business
taxes imposed for each type of business depending on their form of registration.
Business Tax is in addition to Income Tax.
A business can either be a sole proprietor, a partnership or a corporation. It can
either be VAT registered or not.

Value Added Tax is a business tax imposed and collected from the seller in the
course of trade or business on every sale of properties (real or personal), lease of
goods or properties (real or personal) or vendors of services. It is an indirect tax,
thus, it can be passed on to the buyer.

Percentage Tax is a business tax imposed on persons or entities who sell or

lease goods, properties or services in the course of trade or business whose
gross annual sales or receipts do not exceed P3,000,000 and are not VAT-
registered.

Income Tax is a tax on all yearly profits arising from property, profession, trades
or offices or as a tax on a person’s income, emoluments, profits and the like.

Documentary Stamp Tax is a tax on documents, instruments, loan agreements

and papers evidencing the acceptance, assignment, sale or transfer of an
obligation, rights, or property incident thereto.

Withholding Tax

Withholding Tax on Compensation is the tax withheld from individuals

receiving purely compensation income.

Expanded Withholding Tax is a kind of withholding tax which is prescribed

only for certain payors and is creditable against the income tax due of the
payee for the taxable quarter year.
 Final Withholding Tax is a kind of withholding tax which is prescribed only
for certain payors and is not creditable against the income tax due of the
payee for the taxable year. Income Tax withheld constitutes the full and
final payment of the Income Tax due from the payee on the said income.

Withholding Tax on Government Money Payments is the withholding tax

withheld by government offices and instrumentalities, including
government-owned or -controlled corporations and local government units,
before making any payments to private individuals, corporations,
partnerships and/or associations.

Capital Gains Tax is a tax imposed on the gains presumed to have been realized
by the seller from the sale, exchange, or other disposition of capital assets located
in the Philippines, including pacto de retro sales and other forms of conditional
sale.

Excise Tax is a tax on the production, sale or consumption of a commodity in a

country. It applies to goods manufactured or produced in the Philippines for
domestic sale or consumption or for any other disposition; and to imported goods.

Transfer Tax, on the other hand, are taxes imposed on gratuitous transfers or
simply donation.

There are two types of transfer tax:

Donors Tax is a tax on a donation or gift and is imposed on the gratuitous transfer
of property between two or more persons who are living at the time of the transfer
or Donation Inter Vivos.

Estate Tax is a tax on the right of the deceased person to transmit his/her estate
to his/her lawful heirs and beneficiaries at the time of death and on certain
transfers which are made by law as equivalent to testamentary disposition or
Donation Mortis Causa.

Now that we have differentiated business tax and transfer tax, it would definitely
be helpful how we can identify if a particular activity is subject to a business tax or
not.

Objective No. 3: Differentiate a business activity from a non-business

activity.

The tax imposed on an income depends on the activity from which the income is
derived.

A sale in the ordinary course of trade or business is considered as a business

activity and is subject to business tax.
A sale made NOT in the ordinary course of trade or business (isolated
transactions) is generally not subject to business tax. Except, sale of service by a
non-resident foreign person.

A sale of an old laptop by an individual is considered as an isolated transaction

since it was not made in the ordinary course of business, therefore, not subject to
business tax.

A sale of an old truck used by a car dealer to haul the brand-new cars from the
manufacturers is subject to business tax since the sale of the old truck is an
incidental transaction to its business.