Introduction to taxation

Introduction to

TaxationBy: Christian Gravador

Taxation• system of raising money to finance government.• All governments require payments of money—taxes—

from people. • Governments use tax revenues to pay soldiers and police,

to build dams and roads, to operate schools and hospitals, to provide food to the poor and medical care to the elderly, and for hundreds of other purposes. Without taxes to fund its activities, government could not exist.

• Taxation is the most important source of revenues for modern governments, typically accounting for 90 percent or more of their income.

Concept of Taxation• Taxation is the inherent power of the state to

impose and demand contribution upon persons, properties, or rights for the purpose of generating revenues for public purposes.

• Taxes are enforced proportional contributions from persons and property levied by the lawmaking body of the state by virtue of its sovereignty for the support of the government and all public needs

Essential characteristics of tax

1. it is an enforced contribution2. it is generally payable in money. 3. It is proportionate in character, usually based on the ability

to pay4. it is levied on persons and property within the jurisdiction of

the state5. it is levied pursuant to legislative authority, the power to tax

can only be exercised by the law making body or congress6. it is levied for public purpose7. it is commonly required to be paid a regular intervals.

Types of Taxes in the PhilippinesThere are many different kinds of taxes in the

Philippines. But we can group them into two basic types, namely, national taxes and local taxes. National taxes are those that we pay to the government through the Bureau of Internal Revenue.

National Taxes• National taxation is based on the National

Internal Revenue Code of 1997 or the Republic Act No. 8424 otherwise known as the Tax Reform Act of 1997, as amended. The import and export tariffs levied by the Bureau of Customs under Republic Act No. 1937 otherwise known as the Tariff and Customs Code of the Philippines (as amended) can also be considered as national government taxes or duties.

National Taxes• 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.

• 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. Examples of documentary stamp tax are those that are charged on bank promissory notes, deed of sale, and deed of assignment on transfer of shares of corporate stock ownership

National Taxes• Donor’s 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. Donor’s tax is based on a graduated schedule of tax rate.

• 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. Estate tax is also based on a graduated schedule of tax rate.

National Taxes• 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. Self-employed individuals and corporate taxpayers pay quarterly income taxes from 1st quarter to 3rd quarter.

• 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 the amount required to register as VAT-registered taxpayers. Percentage taxes are usually based on a fixed rate. They are usually paid monthly by businesses or professionals.

National Taxes• 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, causing this to increase the prices of most goods and services bought and paid by consumers.

• Excise Tax – is a tax imposed on goods manufactured or produced in the Philippines for domestic sale or consumption or any other disposition. It is also imposed on things that are imported.

National Taxes• Expanded Withholding Tax – is a kind of withholding tax which

is prescribed only for certain payers and is creditable against the income tax due of the payee for the taxable quarter year. Examples of the expanded withholding taxes are those that are withheld on rental income and professional income.

• Final Withholding Tax – is a kind of withholding tax which is prescribed only for certain payers 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. An example of final withholding tax is the tax withheld by banks on the interest income earned on bank deposits.

Local taxesthe local government taxation in the Philippines

are based on Republic Act 7160 or otherwise known as the Local Government Code of 1991, as amended. These taxes, fees or charges are imposed by the local government units, such as provinces, cities, municipalities, and barangays, who have been given the power to levy such taxes by the code.

• Tax on Transfer of Real Property Ownership – tax imposed on the sale, donation, barter, or on any other mode of transferring ownership or title of real property.

• Tax on Business of Printing and Publication – tax on the business of persons engaged in the printing and/or publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and others of similar nature.

Local taxes• Franchise Tax – tax on businesses enjoying a franchise, at

the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction.

• Tax on Sand, Gravel and Other Quarry Resources – tax imposed on ordinary stones, sand, gravel, earth, and other quarry resources, as defined under the National Internal Revenue Code, as amended, extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction.

Local taxes• Professional Tax – an annual professional tax

on each person engaged in the exercise or practice of his profession requiring government examination.

• Amusement Tax – tax collected from the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement.

• Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products

• Tax on Business – taxes imposed by cities, municipalities on businesses before they will be issued a business license or permit to start operations based on the schedule of rates prescribed by the local government code, as amended. Take note that the rates may vary among cities and municipalities. This is usually what businesses pay to get their Business Mayor’s Permit.

Local taxes• Fees for Sealing and Licensing of Weights and

Measures – fees for the sealing and licensing of weights and measures at such reasonable rates as shall be prescribed by the sangguniang bayan of the municipality or city.

• Fishery Rentals, Fees and Charges – rentals, fees or charges imposed by the municipality/city to grantees of fishery privileges in the municipal/city waters, e.g., fishery privileges to erect fish corrals, oysters, mussels or other aquatic beds or bangus fry areas and others as mentioned in the local government code, as amended.

Local taxes• Community Tax – tax levied by cities or

municipalities to every inhabitant of the Philippines eighteen (18) years of age or over who has been regularly employed on a wage or salary basis for at least thirty (30) consecutive working days during any calendar year, or who is engaged in business or occupation, or who owns real property with an aggregate assessed value of One thousand pesos (P1,000.00) or more, or who is required by law to file an income tax return.

Local taxes• Taxes that may be levied by the barangays on stores or

retailers with fixed business establishments with gross sales of receipts of the preceding calendar year of Fifty thousand pesos (P50,000.00) or less, in the case of cities and Thirty thousand pesos (P30,000.00) or less, in the case of municipalities, at a rate not exceeding one percent (1%) on such gross sales or receipts.

• Service Fees or Charges – fees or charges that may be collected by the barangays for services rendered in connection with the regulations or the use of barangay-owned properties or service facilities, such as palay, copra, or tobacco dryers.

Local taxes• Barangay Clearance – a reasonable fee

collected by barangays upon issuance of barangay clearance – a document required for many government transactions, such as when applying for business permit with the city or municipality.

Reference:Bureau of Internal Revenue, Department of

Republic Act No. 8424 (as amended), and Republic Act 7160 (as amended), Republic Act No. 1937 (as amended).