TAXATION

CONCEPTS OF TAXATION AND INCOME TAXATION

DEFINITION OF TAXATION

 It is the process by which the sovereign, through its

lawmaking body, raises revenues used to defray expenses of
government
 It is a way of the government in increasing its revenue under
the authority of the law, purposely used to promote welfare
and protection of its citizenry
 It is the collection of a share of individual and organizational
income by a government under the authority of the law
CONCEPT OF TAXATION

 Taxation is the inherent power of the state to impose and

demand contribution upon persons, properties, or rights for
the purposes of generating revenues for public purposes.
This power is legislative in nature and is essential to the
existence of any independent government.
PRINCIPLES AND THEORIES OF TAXATION

 The Benefit Principle. This principle holds that individuals

should be taxed in proportion to the benefit they receive
from the government.
PRINCIPLES AND THEORIES OF TAXATION

 The Ability-To-Pay Principle. This principle holds that taxes

should relate with the people’s income or ability to pay.
PRINCIPLES AND THEORIES OF TAXATION

 The Equal Distribution Principle. The principle holds that

income, wealth, and transaction should be taxed at fixed
percentage.
STRUCTURES OF A TAX SYSTEM

 A tax is proportional. A proportional tax means that the

government takes an amount of money from a person which
is in proportion to his/her income.
STRUCTURES OF A TAX SYSTEM

 A tax is regressive. A regressive tax means that the

government takes a larger percentage of a person’s income
for tax while he is receiving a lower income.
STRUCTURES OF A TAX SYSTEM

 A tax is progressive. A progressive tax means that the

government takes a larger percentage of a person’s salary for
tax due to his high salary.
SIGNIFICANCE OF TAXATION

 The primary purpose of taxation is to generate

funds/revenues that can be used to defray expenses incurred
by the government in promoting the general welfare of its
citizenry.
 Taxes are the major source of government income.
 Taxes are the lifeblood of a nation.
SIGNIFICANCE OF TAXATION

 Other purposes of taxation includes:

 To equitably contribute to the wealth of nation
 To protect new industries
 To protect local producers
ESSENTIAL CHARACTERISTICS OF TAX

 It is an enforced contribution
 It is levied by the state which
 It is generally payable in cash has jurisdiction over the
 It is proportionate in character person or property
 It is levied by the lawmaking
 It is levied on person or
body of the state
property
 It is levied for public purposes
BASIC PRINCIPLES OF A SOUND TAX SYSTEM

 Fiscal Adequacy. It means that sources of revenue taken as a

whole should be sufficient to meet the expanding expenditures of
the government.
BASIC PRINCIPLES OF A SOUND TAX SYSTEM

 Equality or Theoretical Justice. It means that taxes levied must be

based upon the ability of the citizen to pay.
BASIC PRINCIPLES OF A SOUND TAX SYSTEM

 Administrative Feasibility. It means that taxes should be clear and

plain to tax payers.
BASIC PRINCIPLES OF A SOUND TAX SYSTEM

 Consistency or Compatibility with Economic goals. It refers to tax

laws that should be consistent with the economic goals.
CLASSIFICATION OF TAXES

 As to subject matter
 Personal/Poll/Capitation Tax. This tax means that there is a fixed
amount upon all persons residing within a specified territory with no
regards to their property or occupation. (e.g., Residence Tax)
 Property Tax. This tax refers to one assessed on all property located
within a certain territory on a specified date in proportion to its value.
(e.g., Real Estate Tax)
 Excise Tax. This tax embraces any form of burden not laid directly upon
person or property. (e.g., Value-Added Tax/VAT)
 VAT is a form of sales tax. It is an indirect tax levied upon the consumption
of the sale of goods and services and on the imports of goods into the
country.
CLASSIFICATION OF TAXES

 As to who bears the burden

 Direct Tax. This tax refers to the tax which is demanded from an
individual who tends to buy or purchase a good or service. (e.g.,
Income Tax)
 Indirect Tax. This refers to the tax paid primarily by a person who can
shift the burden upon someone else. (e.g., VAT)
CLASSIFICATION OF TAXES

 As to determination of account
 Specific Tax. This tax is fixed or determinate sum imposed by the
head or number or some standard of weight and measurement, and
requires no assessment beyond listing and classification. (e.g., Taxes
on wines)
 Ad Valorem Tax. This tax is fixed proportionate with the value of the
property and requires the intervention of assessors before the amount
due from each taxpayer. (e.g., Real Estate Tax)
CLASSIFICATION OF TAXES

 As to purpose
 General Tax. It refers to the tax levied to an individual for a general
public purpose.
 Special Tax. It refers to the tax levied to an individual for a particular
or specific purpose.
CLASSIFICATION OF TAXES

 As to scope
 National Tax. It refers to the tax imposed by the state itself and is
effective within the entire jurisdiction thereof.
 Local Tax. It refers to the tax imposed by a political subdivision of the
state and is effective only within the territorial boundaries thereof.
DISTINCTION OF TAX FROM OTHER TERMS

TAX TOLL
 A demand of sovereignty  A demand of proprietorship
 Paid for the use of government’s  Paid for the use of another’s
property property
 May be imposed by government  Enforced by the government or a
only private individual
DISTINCTION OF TAX FROM OTHER TERMS

TAX PENALTY
 Intended to raise revenue  Designed to regulate conduct
 May be imposed by government  Enforced by the government or a
only private individual
DISTINCTION OF TAX FROM OTHER TERMS

TAX
 Based on law
 May not be assignable
 Generally payable in cash
 Any person may be imprisoned
for non-compliance
DEBT
 Based on contract
 May be assignable
 Payable in cash or any kind
 Any person may not be
imprisoned for non-payment
DISTINCTION OF TAX FROM OTHER TERMS

 Tax distinguished from other terms

 Revenue. This refers to all funds or income derived by the
government whether from tax or any other source. It is the amount
collected while tax refers to amount imposed.
 Internal Revenue. This refers to taxes imposed by the legislature other
than duties on imports and exports.
 Customs Duties. This refers to taxes on goods exported to other
countries.
SITUS OF TAXATION

 Situs is a Latin term which means “situation,” “location,” or

“place.” its literal meaning refers to place od taxation.
 In real property, the rule is “tax is imposed to a place or state
where the property is located, subject to be taxed, has a
jurisdiction over the said property
 In movable property taxation, the rule is “tax imposed to movables
follow the law person.
CONCEPT OF DOUBLE TAXATION

 The two concepts of double taxation are:

 Direct Duplicate
 Indirect Duplicate
CONCEPT OF DOUBLE TAXATION

 Direct Duplicate has the following elements:

 Taxing twice
 By the same taxing authority
 Within the same taxing jurisdiction
 For the same purpose
 In the same taxable period
 Involving the same purpose
CONCEPT OF DOUBLE TAXATION

 Indirect duplicate taxation, on the other hand, occurs when taxes

on the property are not imposed by the same taxing authority
FORMS OF ESCAPE FROM TAXATION

 Shifting. It is one way of passing the burden of tax from one

person to another.
 Kinds of shifting:
 Forward Shifting occurs when the burden of the tax is transferred from a
factor of production to the factor of distribution
 Backward Shifting occurs when the burden of the tax is transferred from
the consumer to the producer or manufacturer
 Onward Shifting occurs when tax is shifted to two or more times either
forward or backward
FORMS OF ESCAPE FROM TAXATION

 Capitalization. This refers to the reduction in the price of the taxed

object to the capitalized value of future taxes which the purchaser
expects to be called upon to pay
FORMS OF ESCAPE FROM TAXATION

 Transformation. It occurs when the manufacturer or producer upon

whom the tax has been imposed pays the tax and endeavor to
recoup himself by improving his process of production.
FORMS OF ESCAPE FROM TAXATION

 Tax Evasion. It is the practice by taxpayers through illegal means

to defeat or lessen the amount for tax.
FORMS OF ESCAPE FROM TAXATION

 Tax Avoidance. It is the exploitation by the taxpayer of legally

permissible methods in order to avoid or reduce tax liability.
FORMS OF ESCAPE FROM TAXATION

 Tax Exemption. It is the grant of immunity or freedom from

financial charge, obligation, or burden to which others are
subjected.
 Grounds for Tax Exemption
 Contract
 Public policy
 Reciprocity
KINDS OF TAXES UNDER EXISTING LAWS

 National Taxes. These are taxes imposed by the national

government.
 National Internal Revenue Code
 Income Tax. Tax on person’s income in one taxable year.
 Estate Tax. Tax on the right of the deceased person to transmit his/her
estate to his/her lawful heirs and beneficiaries
 Donor’s Tax. Tax derived from donations/testamentary disposition
 Inter Vivos (made between living persons; effective during the lifetime of the
donor)
 Mortis Cansa (made in the nature of testamentary disposition; effective upon the
death of the donor)
KINDS OF TAXES UNDER EXISTING LAWS

 Value-Added Tax. Tax levied on the sales, barter, exchange, or lease of goods,
properties, and services, and on the importation of goods. (12%)
 Withholding Tax on Compensation. Tax from income payment to individual
arising from employer-employee relationship.
 Excise Tax. Tax imposed on certain specified goods manufactured/produced
inside the country for domestic purposes
 Documentary Stamp Taxes. Tax on documents, instruments, and papers
evidencing the acceptance, assignment, sale/transfer of an obligation right of
property
KINDS OF TAXES UNDER EXISTING LAWS

 Customs Duties. Tax levied on all articles imposed in the country.

 Travel Tax. Tax imposed by the government on persons who are leaving the
country regardless of the country where the air ticket is issued.
 Energy Tax. Tax imposed to discourage uneconomic consumption of fuel
 Electric Power Consumption. Tax imposed on the monthly consumption of every
residential customer.
 Private Motor Vehicle Tax. Tax that was issued to rationalize the structure of tax
on private motor vehicle by basing the same on ability to pay of the owners
KINDS OF TAXES UNDER EXISTING LAWS

 Local Taxes. These are taxes imposed by the local government.

DIFFERENT AUTHORITIES IN IMPOSING TAX

 National Government. This refers to the national government

imposing tax.
 Municipal or Local Government. This refers to the municipal or
the local government or a public corporation imposing tax.
CLASSIFICATION OF TAXPAYERS

 Individual Taxpayer  Foreign

 Resident Citizens  Resident Corporation
 Non-resident Citizens  Non-resident Corporation
 Resident Aliens  General Professional
 Non-resident Aliens Partnership
 Corporate Taxpayer  CPA

 Domestic Corporation  Lawyer

PUBLIC OFFICER IN CHARGE OF TAX
COLLECTION

 Finance Secretary
 Commissioner on Internal Revenue
 Commissioner of Customs
 Provincial Treasurer
 City Treasurer
 Municipal Treasurer
TAX REMEDIES OF THE GOVERNMENT AND
TAXPAYERS

 Distraint/Distress. This refers to seizure by the government of

personal property, tangible or intangible, to enforce the payment of
taxes.
 Actual Distraint. The government takes the property from the
taxpayer’s possession which involves physical transfer.
 Constructive Distraint. The possession remains with the taxpayer but
he is not allowed to dispose the said property subject of distrain.
TAX REMEDIES OF THE GOVERNMENT AND
TAXPAYERS

 Levy. This pertains to the same act of seizure but of real property
in order to enforce the payment of taxes.
 Forfeiture. This pertains to divestiture of a property without
compensation in consequent of a default or offense.
 Compromise. This pertains to a contract whereby parties avoid
litigation.
INCOME TAXATION

 Income refers to all wealth which flows into the taxpayer other
than as mere return on capital. Capital, on the other hand, refers to
the investment made which is the source of income.
 Income Tax refers to the tax imposed on the net income or the
entire income received by a taxpayer in one taxable period.
GROSS INCOME, TAXABLE INCOME, NET
INCOME

 Gross Income refers to all income from whatever source but not
excluding exempt income and the income subject to final income
tax. (e.g., salaries and wages, commission, rents, etc.)
 Exclusion from gross income are those of:
 Life insurance, compensation, retirement benefits, etc.

 Deductions are those amounts which the law allows to be deducted

from the gross income to arrive at taxable income.
GROSS INCOME, TAXABLE INCOME, NET
INCOME

 Taxable Income refers to a pertinent item of gross income

specified in the tax code less deduction of personal and/or
exemptions.
 Net Income refers to the gross income less allowable deductions.
STATUS OF TAXPAYERS

 Single. It refers to an individual who is unmarried. He/she may

also be widowed or a married individual but judicially decreed as
legally separated or annulled with no qualified dependents.
 Head of the Family. It refers to an unmarried or legally separated
man or woman with one or both dependents.
 Married.