HOLY INFANT COLLEGE

TACLOBAN CITY

LESSON 1: FUNDAMENTALS OF TAXATION

INTRODUCTION

There are various ways for the government to generate funds. In some countries, the government
borrows funds from local and internationals banks, sells public lands and other government properties, and
invest in corporation. Taxes, however provide most of the countries revenues.

This topic focuses on fundamentals of taxation and its importance to the development and progress of an
economy. Taxes are the government main source of funds for its necessary expenses. In the Philippines, the
process of taxation is unpopular and often times controversial, like the imposition of the EVAT. it is imperative
for us to study and learn taxation so we could better understand its process. Eventually, we will be more aware
and committed to paying taxes.

One of the government’s primary duties is to provide for the basic needs of its citizen through social
services. But the government needs to have enough funds to cover the expenses for these services. Thus, the
constitution mandates the government to collect fees from individuals who earn income or who own properties
of business. This process of collecting of this fees is called taxation.

Taxation undergoes two stages. First, the legislatures levies or impose a tax. Afterward, the concerned
government agencies collect it. Part of their job includes enforcing sanctions for tax evasion.

DEEPENING IN DETAILS

NATURE OF TAXATION

Taxation is a state power exercised through the country’s legislative body.

In the Philippines, tax laws are passed both in the House of Representatives and the Senate.
The principle of taxation state that taxes are collected to support the government in its expenses and
services for public welfare. This principle resides in our constitution, which lays down the relationship between
the government and the people. This is known as the reciprocal duties of protection and support between this
state and its citizen.
The constitution also states that revenues through taxation must only be used for government operations
and for public welfare.
Any misconception that taxes are imposed by the government for private or unlawful purposes must be
corrected. The government must make use of taxes wisely, rightfully and effectively. This would ensure a good
relationship between the government and its stakeholder.

PURPOSE OF TAXATION

The purpose of taxation is to raise revenues from all possible sources to support government
expenditures and services and to promote the general well-being and protection of its citizen.
Tax collections is vital for a country’s progress. It is important for every citizen to pay his/her taxes.
Government projects will not materialize if funds are inadequate. The government, for its part, is expected to
create tangible and intangible programs intended to improve the lives of the people and to enhance their moral
and materials values.

CANONS OF TAXATION

The canons of taxation refer to the basic principles of a sound tax system. It underscores the following:
fiscal adequacy, administrative feasibility, and theoretical justice.

Fiscal adequacy means means the taxes collected by the Bureau Internal Revenue (BIR) must be
sufficient to fund the necessary government expenditures and basic services in a given fiscal year. This also
means that revenues must be capable of adjusting to variations in public expenditures.

Administrative feasibility means the payment of taxes must be taxpayers friendly, i.e, tax laws must be
capable of simple, just and effective administration. This also signifies that payment of taxes must be accessible
and convenient. The time of payment and manner of collection must not be burdensome to the taxpayers.

Theoretical justice refers to the “ability to pay” principle. This means that a tax burden must be
proportionate to the tax payer’s level of income, i.e., people who earn more should be taxed at a much higher
rate than those who earn less. Thus, a person whose income is PHP 15,000/month should not pay the same
amount of tax as a person earning 40,000/month.

BASIS OF TAXATION

There are different government institution that administer and enforce the different policies about taxes.
These institutions functions based on the legal foundations and provision upon which taxation rest. These legal
bases are the following.

1. The constitution, the fundamental law of the land

2. Statutes, laws passed by congress
3. Presidential Decrees
4. Judicial decision by the Supreme Court on tax cases
5. Bureau of Internal Revenue rules and regulation
6. Provincial, city and municipal ordinance
7. Observance of international agreement
8. Administrative rulings and opinions.

OBJECTS OF TAXATION

Taxes are levied on different taxable entities. Taxable entities are those that bear the burden of taxation.
Some examples are the following.
1. Individuals who earn a considerable amount of income as a worker, or as a businessman in partnership or
corporations, including those who inherited a property or were given a gift or donation of a considerable value;
2. Tangible and intangible properties, whether personal properties (movable properties) that can be moved or
relocated such as vehicles, furniture, patents and ownership titles or real properties (immovable properties)
which refer to real states that include land, buildings and houses.
3. Transaction, consumption interest, imports and export and privileges

SITUS OF TAXATION

Situs is a Latin term for “place” or “location”. it refers to the place where taxes are to be paid. As a
general rule, the taxing power cannot go beyond the territorial limits of the taxing authority. Taxes are paid
where the taxable entity can be found.

The following are the situs of taxation of the more common taxes.

1. Income Tax
This is paid either in the place where the income is earned or the placed of residence of the taxpayer. For
example, Ms.X resides in Quezon city and works in Makati. She may choose to pay her income tax in either of
these two places.

2. Real Property tax

For real property tax, this is paid where the property is situated. If the property is located in Bulacan, its
tax must be paid in the said province, specifically in the city or municipality where is located.

3. Personal Property Tax

Personal property, as mentioned, can either be tangible or intangible. Taxes on tangible properties are
paid in the place where the property is located, similar to real property tax. On the other hand, the situs of
taxation of intangible properties is the owner’s domicile. This refers to the place where the owner permanently
resides.

4. Business and Occupation Taxes

This is paid in the place where the business or occupation is located.

LIMITATIONS ON TAXATIONS
Taxation is limited to certain provisions. These are two types of limitations; Inherent and Constitutional.

Inherent limitations are rooted in the nature of taxation itself. These are specific limitations that are not
affected by changes in the provisions of the Constitution. Below are the Inherent of taxations.
1. The tax revenues must only be used for public purpose. This means that the revenues collected from the
people must be returned to them in the form of security, peace, and order maintenance , social and economic
welfare, such as the construction of government hospitals, learning institutions, public roads and bridges, etc.

2. There should be proper delegation of legislative power to tax. The 1987 Constitution delegates to local
government units (LGUs) the power to tax subject to such limitations as may be provided by congress (Art.X
Sec.5). likewise, congress cannot delegate the power to tax, except to authorize the President, subject to
limitations and restrictions, to impose tariff rates, import and export quotas, and other duties, etc (Article VI,
Section 28,No.2)

3. Government entities are exempted. The government obtains its revenue from axing the people. The taxing
the government itself will not generate income. That is why it is exempted from taxation. However, the
government agencies performing propriety functions, like the Land Bank of the Philippines (LBP) or Philippine
National Railways (PNR), are generally subject to tax, except when exempted by their charters or law law
creating them. Likewise, all tax exemptions enjoyed by government-owned or controlled corporations (GOCCs)
have been abolished.

4. There are territorial jurisdictions. Only those persons, properties, and transactions situated within the
territorial limits of the state are taxable. But all Filipino citizens who work abroad are still subject to taxation as
long as they remain Filipino citizens.

5. There is an observance of international law. Foreign ambassadors and their properties enjoy reciprocal
exemptions.

Constitutional limitations of taxation are those limitations provided in the constitution. These limitations
are more prone to change when a new constitution is introduced in the country. To date, the Constitutional
limitations of taxation in the country are based on the 1987 Constitution. Here are the Constitutional limitations
of taxation.

1. Observance of due process of law

Article III, section 14.1 of the constitution says that, “No person shall be hold to answer for a criminal
offense without due process of law”
This may be applied to a tax payer accused of tax evasion. Before the person is penalized for the act, he
must first be accorded his right to due process of law. Likewise, a taxpayer may not be deprived of his property
because of non-payment of taxes without giving notice to him as required by law of his tax liability.

2. Equal protection of the law

No person shall be deprived of life, liberty, or property without due process, nor shall any person be
denied the equal protection of the laws (Art. III, Sec.1).
This means that all person must be treated alike under similar circumstances and conditions, both in the
privileges enjoyed and liabilities imposed. Hence, a municipality or city ordinance that requires aliens to secure
permit the mayor’s office before they can earn their means of livelihood is void and unconstitutional. The
shelter of protection clause is given to all persons, aliens or citizens alike.

3. Uniformity and equity rule

The rule of taxation must be uniform, equitable, and progressive (Art. VI, Sec28.1). The reason for this is
that not all persons, properties, or transactions are identical or similarly situated.
This means that all taxable articles or properties of the same class shall be taxed at the same rate. The
classification of the subjects of taxation must be based on reasonable and substantial grounds.

4. Non-imprisonment for non - payment of poll tax.

No person shall be imprisoned for debt or non - payment of a poll tax (Art.VI, Sec 28.1)
A poll tax (personal or capitation tax) is fixed amount imposed on individuals residing within a specified
territory. These individuals, regardless of their citizenship and of their property or occupation, may acquire their
community tax. Individuals are not required to pay community tax unless needed for job applications or other
purposes.

5. No appropriation for religious 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; or
of any priest, preacher, minister or other religious teacher, or dignitary as such, except when such priest,
preacher, minister or dignitary is assigned to the armed forces, or to any institution or government
orphanage or leprosarium. (Art.VI, Sec 29.2)
But charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non
profit cemeteries; and all lands, buildings and improvements - actually, directly and exclusively used for
religious charitable or education purposes shall be exempt from taxation (Art.VI, Sec28.3) these institutions are
exempted from real property tax.

DOUBLE TAXATION
Double taxation refers to an instance when an income, property or a transaction was imposed with two
or more taxes by taxing authority in the same year. This happen when, for example two or more countries claim
to have taxing authority over the same object of taxation. This is possible when the countries imposing taxes use
the different tax base. For example, when a foreigner conducts a business in the Philippines, our country will
charge taxes on him since he is within its territorial jurisdiction. Meanwhile , the foreigner’s home country will
also collect taxes from him based on its residential jurisdiction.
In contrast, indirect duplicates are allowed. This refers to taxes that are paid by the same individual or
corporation based on two or more different different taxing bases. For example, suppose an imported like a
canned corned beef was charged with import tax. When in reaches the market for consumption, the canned good
will also be charged with value added tax (VAT). this is then a case of double taxation.

AVOIDING TAXATION
The following are other concepts related to taxation in terms of avoidance or nonpayment.

Shifting
This is the transferring of the tax burden from one person to another. For example, the 12% EVAT
imposed on businessmen, certain items and professionals are usually passed on to their customers and clients.

Capitalization
This is done by reducing the price of a taxable product or service to lower the tax that will be imposed
on its consumption. For example, a salesman would offer a lower price for a real property in order to lower the
real property/real state tax.

Tax Avoidance
This refers to the availing by the taxpayer of legally allowable means in reducing or minimizing the tax
due on certain properties, items and services. This is also known as “tax minimization”. for instance, an owner
of commercial lands converts his properties into a corporation with his children as incorporators. This is done in
anticipation of a much higher estate tax to be imposed upon his heirs.

Tax Evasion
This refers to the use by the tax payer of illegal means in escaping,defeating, or lessening the tax due.
Also referred to as “tax dodging” this crime implies malice, fraud or bad faith on the part of the taxpayer. A
good example is when a taxpayer deliberately does not declare his taxable items or does not pay taxes at all.

Tax Exemption
This means the bestowal of immunity by the taxing authority on a taxpayer from the obligation of tax
payment. For instance, winning in the lottery is tax exempt.

LESSON 2: TAX

INTRODUCTION

Taxation is a means for a state, through laws and legislation, to obtain income to finance public
expenditures. Through taxation, the government is able to provide public education, health services, and
infrastructures that benefits its citizen.
Because taxation is an obligation, that is, it requires us to contribute a certain proportion of our income
or wealth, it gives an impression that is burdensome. However, we learned in previous lesson that taxation must
also meet some principles or canons for it to be effective and less demanding.
In this lesso, we will deal with the characteristics of tax, its nature, classification,kinds and system to
deepen our knowledge, understanding and appreciation of the fundamental of taxation.

DEEPINING IN DETAILS

NATURE OF TAX
Tax is an onus, a Latin term for “burden” or “obligation.” Tax is a free imposed upon individuals,
properties, transaction and business entities to support the necessary expenses and services of government,
 As defined by Cooley, a tax is “an enforced proportional contribution from persons and property, levied
by the state by virtue of its sovereignty for the support of government and for all public needs.

The term taxes should not be confused with taxation. A tax is the fee, which percentage of income,
property value, or transaction, to support the government in its expenses and services. On the other hand,
taxation is the process by which the government collects tax and generates revenues that are necessary for its
expenses and social services. It is one of the ways the government augments it revenues to effectively perform
its prime duty of protecting, supporting and promoting the welfare of its people.

ESSENTIAL CHARACTERISTICS OF TAX

From the definition, it is clear that tax has these primary characteristics.
1. It is obligatory or forced contribution to government.
Paying taxes is a legal duty for each individual, whether a citizen or an alien, who earns income
from business and industries in the country.

2. It is usually monetary in form

This means that for practical purposes, taxes are to be paid in monetary amount.

3. It is proportionate in character.
The amount of tax imposed on each individual is based on his ability to pay. There is a principle
of equity when levying taxes.

4. It is imposed on persons and properties

A tax is imposed on (a)persons who earn income as employee or as a businessman,
(b)compensation, ( c) transaction, (d) shares from the stocks, (e)gifts and (f) properties or sale of
properties.

5. It is levied by the state that has jurisdiction over the person or property.
This means that person and properties charged with taxes should be within the jurisdiction of the
taxing authority. Only those individuals who are residents of the country and those who derive income
therein are subject to the taxing authority.

6. It is levied by the legislative body of the state.

The power to tax is a power of the legislature. In the Philippines, a tax laws originate exclusively
from the House of Representatives.

7. It is levied for public purposes.

Tax is a burden or charge imposed by the state on people to generate revenues intended for
public use, its expenses and for other purposes.

CLASSIFICATION OF TAXES
Taxes are classified to enable citizens to be aware of the many charges the he/she needs to pay to
support the government. Taxes are classified into the following bases:

1. According to object
A. Personal tax - is a fixed amount imposed on individuals residing within a specified territory, regardless of
their property,occupation and business in which they may be engaged in.
B. Property tax - is paid based on the value of the property to be levied.
C. Consumption tax - is levied on goods and services that people consume from the market. This tax usually
passed on to consumers by adding the amount of the tax to be paid to the price of the good or service.

2. According to who bears the burden

A. Direct tax - is paid by the person directly.
B. Indirect tax - is paid indirectly by an individual to the government through intermediaries such as goods and
services.

3. According to the determination of the amount of tax to be paid.

A. Specific tax - is imposed on some goods based on its quantity or by other standard s f measurement.
B. Ad valorem - is a Latin phrase which means “according to the value.” this tax is imposed on goods based on
their value or price.

4. According to purpose
A. General tax - is imposed for the general needs of the government, such as to raise revenue for public
expenditures.
B. Specific tax - is imposed for special purposes, like regulation and maintenance of a public services. Example
of such are the protective tariffs or customs duties on imported goods to enable similar products produced
locally to compete in the local market.

5. According to scope or authority imposing the tax.

A. National tax - is imposed by the national government. Example Of this tax are national internal revenue
taxes, costume duties and national taxes by special law.
B. Local tax - is imposed by municipal corporations or local government units. Example of this tax are the
professional tax and community tax

6. According to the tax system.

A. Proportional tax - is imposed at a fixed percentage of the taxable object’s market price. With this, the tax
rate of the good remains fixed even if the prices of the goods increase.
B. Progressive tax - rate increases as the price of the goods or tax increases. Example: income tax, estate tax,
and donors tax.
C. Regressive tax - rate decreases as the price of the good or tax increases. This means that the tax rate and tax
base move in opposite directions.

LESSON 3: NATIONAL TAXES

INTRODUCTION:

We learned from the previous lesson the general characteristics, classification, and types of taxes. In this
lesson, we will go further on the national taxes imposed by the Government, specifically, income tax. It is
important to learn the basics of income tax and how it is computed. This knowledge will be a tool to better
understand and appreciate the concept of taxation.
There are two kinds of taxes under existing laws in the Philippines. They are national and local taxes.
National taxes are imposed by the government through the National Internal Revenue Code and other related
laws, such as the Tariff and Customs Code. Local taxes, on the other hand are those imposed on the Local
Government Code. Some of these are the real property tax and community taxes.

KINDS OF NATIONAL TAXES

Section 21 of the Tax Reform Act of 1997 or the National Internal Revenue Code, enumerates the
different fees of charges considered as national taxes. They are as follows.

1. Income tax
2. Estate and donor’s taxes
3. Value-added tax
4. Other percentage taxes such as:
- hotels,motels and others
- caterers
- carriers and keepers
- dealers in securities and lending investors
- franchises
- overseas communication
- banks and non-banks financial intermediaries
- finance companies
- insurance companies
- amusement
- winnings
5. Excise taxes on certain goods
6. Documentary stamp taxes
7. Other taxes that may be imposed by law and collected by the Bureau of Internal Revenue

The following are also considered as national taxes imposed by special laws:
1. Tariffs and customs duties (P.D No. 1464)
2. Sugar adjustment taxes ( C.A No. 567)
3. Taxes on Narcotic drugs (R.A No. 953)
4. Travel tax (P.D No. 1183)
5. Private motor vehicle tax (E.0 No. 43)
6. Energy taxes (P.D No. 844 and 845 and B.P Blg 36)

INCOME TAXATION
 Income is defined as all wealth that flows into the taxpayer's assets other than as a mere return on
capital. Hence, the income of an individual remains to be a mere receipt if no profit is generated, or there is just
a return of capital.

Capital applies to investment from which income is derived. Often, it refers to a fund or property
existing at a given time. Hence, income tax is the tax on the net income or the entire income received in one
taxable year.

Income tax is imposed at progressive rates. There is one set of scheduled rates for compensation or
employment income and one for business, professional and other types of non-compensation.

CLASSIFICATION OF INCOME AND RELATED CONCEPTS

Taxable Income - this refers to the gross income after personal and additional exemptions have been deducted.

Passive Income - this applies to income from interest on banks, deposits, dividends, royalties prizes and other
winnings.

Gross Income - this refers to all income, regardless of kind or form, derived from any source. All kinds of
income are taxable, even those derived from gambling.

Net Income - this is the gross income after the allowable deductions have been subtracted.

Deductions - these are the amounts that the law allows to be subtracted from the gross income.

CLASSIFICATION OF TAXPAYERS

The Tax Code of the Philippines classifies taxpayers into the following:
A. Individuals
1. Citizens
2. Aliens

B. Corporations
1. Domestic or those incorporated under the Philippine laws.
2. Foreign or those incorporated under the Philippine laws of their respective countries.

C. General partnership
1. General professional partnerships formed by persons for the primary purpose of exercising their common
professions.
2. General co-partnership formed for the sole purpose of engaging in trade or business.

INDIVIDUALS REQUIRED/NOT REQUIRED TO FILE INCOME TAX RETURNS

The tax return is the sworn statement where the tax payer states the nature and extent of his tax liability
for the taxable year.

Under the tax law, the individuals required to file an income tax return are:
1. Every resident citizen, regardless of the source of his/her income within or outside of the Philippines.
2. Every non-resident citizen and resident alien, for their income from sources within the Philippines; and
3. Every non-resident alien engaged in trade, business, or in the exercise of his/her profession in the Philippines,
for his/her income from sources within the Philippines.

On the other hand, individuals not required to file an income tax return are:
1. Any individual whose gross income does not exceed his/her total personal and additional exemptions for
dependents, excepts if engaged in business or practice of profession, regardless of the amount of gross income.
2. Any individual earning from single employer with a pure compensation income not exceeding PHP 60,000
the income tax for which is already withheld by the employer.
3. Any individuals whose income concurrently from two or more employers at any time during the taxable year
even if it does not exceed PHP 60,000.

SURCHARGES AND INTEREST

A surcharges is an amount imposed by the law in addition to the principal tax in the event of
delinquency. The BIR commissioner shall impose surcharges as follows:

1. In case of false or fraudulent tax return willfully made, 50% of the tax or deficiency tax;
2. In case of a willful neglect to file a tax return within the time prescribed by law, 50% of the tax;
3. In case of failure

To file any income tax return and pay the tax due thereon required on the date prescribed;
A) To pay the deficiency tax within the time prescribed for its payment in the notice of
assessment of the BIR;
B) To pay the full payment of tax shown on any tax return required of the full or part of the
amount of tax due for which no tax return is required, on or before the date prescribed by law for
its payment, not due to willful neglect, 25% of the amount due;
C) To file a tax return with the proper revenue, I.e., in the city or municipality where the
taxpayer has his/her legal residence or principal place of business, 25% of the amount due.

Likewise, the tax payer is liable to pay interest at the rate of 20% per annum for any unpaid tax from the
date prescribed by the law for its payment of from the due appearing in the notice and demand by the BIR
commissioner until it is fully paid.

APPLICATION ACTIVITY:

1. Why do we see taxes as a burden?

2. Why are government agencies exempted from taxes?